Government subsidies that selectively favor a particular firm or firms may substantially distort competition within an industry, thereby skewing trading terms, reducing efficiency, and harming consumer welfare. To its credit, the European Union (EU) seeks to stamp out distortive state aid, as explained by the EU’s administrative and law enforcement arm, the European Commission (EC):
A company which receives government support gains an advantage over its competitors. Therefore, the Treaty [governing the EU] generally prohibits State aid unless it is justified by reasons of general economic development. To ensure that this prohibition is respected and exemptions are applied equally across the European Union, the European Commission is in charge of ensuring that State aid complies with EU rules. . . .
State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings [businesses] by national public authorities. Therefore, subsidies granted to individuals or general measures open to all enterprises are not covered by this prohibition and do not constitute State aid (examples include general taxation measures or employment legislation).
A nation’s tax preferences that selectively advantage a specific firm or firms may constitute a form of state aid, and in recent years the EC has challenged various member states’ corporate tax rules that allegedly have such a preferential effect. Particular attention has focused on an August 2016 EC finding that Apple, Inc. owed roughly $14.5 billion in back taxes to Ireland, due to an Irish tax ruling that granted the company a preferential corporate tax rate in violation of EC state aid principles.
This EC finding, which is opposed by the Irish and U.S Governments and has been appealed to the European courts, is the subject of an April 27 Heritage Foundation “Backgrounder” essay, co-authored by Heritage Senior Fellow David Burton and me. In our essay, we point out that, whatever the legal merits of this particular holding, the EC’s recent “crusade” against low corporate taxes achieved through various national preferences raises the broader issue of “tax competition” among jurisdictions that may beneficially constrain the size of government. Our article’s findings and policy recommendations are as follows:
High taxes, especially high marginal income tax rates, have an adverse impact on economic growth, and tax competition among governments imposes a limit on how high governments can raise tax rates and burden the private sector. Efforts to suppress tax competition or to harmonize taxes are generally an effort to create a “tax cartel” among likeminded governments to keep taxes high. The European Union’s Apple ruling, similar to other recent EU investigations of tax reductions, may have the effect of discouraging beneficial tax competition among European nations. The United States should reject calls by the Organisation for Economic Co-operation and Development and other multinational bodies to promote “tax harmonization,” which tends to promote overly high tax burdens that discourage economic growth. The United States also should lead by example, reducing its economically harmful tax burdens and encouraging other countries to do likewise.