Tax Competition and Tax Co-Operation in the EU

It took the European Union (EU) 35 years to achieve a co-operative agreement on co-ordinated measures of savings taxation. Political science has offered two explanations for this. First, co-operation is difficult to achieve as a result of heterogeneity. Countries with a small domestic tax base favor tax competition, while countries with a large tax base prefer tax co-operation. Second, co-operation is difficult as a consequence of specific characteristics of the collective action problem involved. The actors face a prisoners’ dilemma. Both explanations have their limits. The first approach is not very good at predicting actual policy preferences of governments and the second approach dismisses the fact that the EU offers cooperative institutions that should be able to resolve a dilemma. The paper refines these explanations such that the theory fits better the empirical positions of EU governments and their problems of finding an agreement.