1. Factor mobility in diagram Home country: Producer: -a-b Employee: +a+b+c Total +c Foreign country: Producer: +d+e Employee: -e Total +d Total gain: +c+d

2. The results It leads to convergence in real wage –Real wages rise in home – and Fall in Foreign It increase the world’s output as a whole –Foreign gain is larger than home loss Despite the gains, some people are hurt by the change –Home producers –Foreign worker

3. Capital mobility Consumption-investment decision Present Consumption Future consumption Consumption possibility frontier C t+1 =f(I-C t )

4. Present Consumption Consumption possibility frontier if capital movement is allowed Domestic investment

5. Labour mobility i.The Treaty of Rome (1958)  Forbid discrimination on the basis of nationality within the EU  Stipulated any nationality-based discrimination between workers in terms of employment, pay and working conditions to be phased out by 1969.  Included the “right of establishment”, any national of any member state to establish a business or set up a subsidiary in any other member state. These rights had been established by the end of the transition period in manufacturing but obstacles remained in a number of services and professions. ii.The Single European Act (1986)  Removed barriers arising from different professional qualifications.  Removed trade terriers in the service sector (especially banking and financial services) including those affecting the “right of establishment”. iii.The Schengen Agreement (1985)  1985 France, Germany and the Benelux countries agreed to remove frontier checks by 1990; implementation delayed by concerns over crime. Other member countries (not UK} subsequently joined.  1995 The Schengen Agreement comes into force between Belgium, Germany, France, Luxembourg, the Netherlands, Spain and Portugal with plans for the other countries to follow once the appropriate border arrangements are in place. (Sweden and Austria)  A “Schengen computer” is now set up to share Police data.

6. Capital mobility i.The Treaty of Rome (1958). Abolished restrictions on capital movement and discrimination based on nationality but only to the extent necessary to ensure proper functioning of the Common Market. Restrictions on capital movement allowed remaining where necessary for macroeconomic management. ii.The Single European Act (1986). Abolished remaining capital market restrictions. Retained safeguards to allow their reintroduction in exchange rate crises

7. Tax competition Payoff Matrix for “Tax Competition”. High taxes in B Low taxes in B High taxes in A 3333 4040 Low taxes in A 0404 2222

8. The destination principle The destination principle is that consumers should pay the same tax rate regardless of the origin of the goods they are buying. The intention is that consumer choice and the competitiveness of different countries goods should not be distorted by differences in countries' tax rates. This is the principle under which international trade including within Europe has operated under up to now But the differences in other tax rates may create this distortion –Example: Income tax in Sweden should be relaxed by higher wages and, therefore, higher labour costs, which reduce competitiveness –VAT: before 1992 there were different VAT tax rates which may be used for protectionism in free- movement area. Moreover VAT exemptions were used. It was possible to buy goods in tax-Free shops in airports. Before 1992 exports were zero rated VAT, importers paid VAT at the rate of destination country.

9. Harmonization of social policy Labour mobility –Incentives Social security Maternity live and children allowance –Obstacles to Freedom of movement

10. Harmonization of corporate tax EU Corporate Tax Rates Austria: 34% Belgium: 40% Denmark: 34% Finland: 28% France: 40% Germany: 42%-51% Greece: 35%-40% Ireland: 20% Italy: 19%-37% Netherlands: 35% Portugal: 37.4% Spain: 35% Sweden: 28% UK: 30% source: IFS Reference Philipp Genschel ”Globalisation, Tax Competition, and the Fiscal Viability of the Welfare State”, Max Planck Institute for the Study of Societies Working Paper 01/1, May 2001 http://www.mpi-fg-koeln.mpg.de/pu/workpap/wp01-1/wp01-1.html BBC news: Tuesday, 5 December, 2000, 13:03 GMT Taxing issues for Europe http://news.bbc.co.uk/1/hi/business/1045441.stm http://news.bbc.co.uk/1/hi/business/1045441.stm

11. High income tax rate creates incentives for labour movement Possible Solution: Competitive provision of luxury public goods Entertainment –Libraries and museums –Golf Clubs –Concerts

12. Disadvantage of Subsidiarity Differences between member states should be taken into account. 1.Social policy objectives. choices about penalising smoking 2.Distributional goals. Country may have different degree of inequality Bolton and Roland suggests this explains the break-up of Czechoslovakia 3.Public spending choices and therefore revenue requirements. Difference in climate 4.Demand conditions. Different price and income elasticity mean the same taxes have different efficiency and distributional properties in different countries.