How to Focus Corporate Income Tax Competition on Mobile Business Activities?

The logic of international tax competition requires that European countries reduce their corporate income tax rates for mobile business activities. It does not require them to reduce their tax rates on business profits overall. Yet, that is what has happened in many countries. The spill-over effects of corporate income tax competition on personal income tax revenues are considerable. The reason is obvious: smaller firms tend to incorporate, to enjoy the benefits of a lower tax rate. And wherever the policy response is to reduce the personal income tax burden on profits, labour tends to assume the legal form of business profits. And when the tax treatment of independent vs. dependent labour gets out of balance, the wage income tax base suffers from the forces of corporate income tax competition.The policy problem to be discussed in this paper is how international tax competition can be reduced in scope, to limit the spill-over effect on domestic tax bases. What is the best way to reduce the (effective) tax rate on mobile business activities while maintaining the tax burden on immobile activities? We will discuss four approaches:- mandatory transparency of corporations below a certain size threshold for personal income tax purposes;- a dual income tax with a split between labour and capital income for all smaller firms;- corporate income tax measures aimed at specific – mobile – business activities;- a general reduction of the effective tax rate for large corporations.Alternatives will be compared on four criteria: effectiveness, administrative feasibility, compatibility with EU legal framework, and political stability