Is Tax Competition Harmful?

There is an on-going debate about tax competition or tax harmonization. The high-tax welfare states want to keep tax rates high so that they can continue to fund their social welfare programs. But they are losing business and investments to lower tax jurisdictions where governments let people and businesses keep a higher percentage of their income. This issue is especially relevant in the European Union, since the older members tend to have relatively high tax rates, whereas some of the new members have relatively low tax rates. This paper examines this issue and attempts to answer the question of whether tax competition is harmful