Pareto－Improving Tax Harmonization in Indirect Taxes：A Survey

With the growing integration of markets for goods and capital within the EC and thereby making the tax base both mobile and highly elastic, the harmonization of indirect taxation (VAT and excise taxes) has become a central issue in the discussion of tax policy in the EC. From the tax reform point of view, it is practical to present recommendations for ‘directions’ of small and implementable tax changes that provide strict welfare gains for one (potential Pareto improvement) or all (actual Pareto improvement) countries. In this survey, we attempt to survey Pareto－improving tax harmonization in the EC perspective. We define tax harmonization by the ‘movement of initially divergent domestic tax rates across countries towards a common or average tax rate which is harmonized by agreements between countries so as to remove trade distortion induced by tax differentials and to share collective gain’. Given that distortions arising from tax differentials exist in each country and starting from initial non－harmonized tax rates between countries, can a movement towards the average common tax rate proposed by EC Commission achieve Pareto improving? According to the relevant literature, a move towards a weighted average of pre－existing different commodity taxes may generate a potential Pareto improvement.