1 Philipp Genschel B R E M E N Tax competition, tax harmonization and tax innovation Presentation for the workshop on ‚Policy learning and experimentation in EU economic governance: Laboratory federalism in practice?‘ London, March 2006

2 1. Market integration v. policy experimentation – a trade-off Internal Market An ‚area without internal frontiers in which the free movement off goods, persons, services and capital is ensured …’ (Art. 14 EC Treaty) Basic requirement: elimination of internal frontiers Laboratory federalism A multilevel governance system which ‘ … contains the risks of policy experiments to a smaller part of the polity …’ (Conference Program) Basic requirement: keeping up of internal frontiers

3 2. The EU tax policy regime focuses on market integration All policy instruments are geared towards the elimination of tax barriers and distortions in the Internal Market Tax harmonization Competition policy Tax jurisprudence Soft coordination

4 3. The EU tax policy regime constrains national policy experimentation – empirical illustrations Tax harmonization Taxation of labour-intensive services Reverse-charge system IRAP Tax competition Expenditure taxation Corporate-personal tax integration

5 4. The costs of market integration – two perspectives Traditional perspective: Loss of capacity for democratic self-government and problem solving at the national level Dynamic perspective: Undersupply of policy variation and learning opportunities at the European level

6 5. Objections? Room for national tax policy experimentation is reduced but not eliminated in the EU Internal Market. Freedom for policy experimentation may be abused for protectionist purposes. Less policy experimentation in the public sector may lead to more business experimentation in the private sector.