| Review of: | Taxes and Exchange Rates in the EU by J. Lorié |
|---|---|
| Reviewed By: | Brian Ardy |
| Reviewed in: | Journal of Common Market Studies |
| Date accepted online: | 02/11/2007 |
| Published in print: | Volume 45, Issue 03, Pages 745-769 |
Book Reviews
The EU liberalized financial capital markets in July 1990 but this did not integrate capital markets. With Member States retaining discretion over taxation and monetary policy, barriers to the movement of capital remained. Wide differences persisted among EU members on the taxable base and tax rates on income from financial assets. This is familiar, but where John Lorié's book diverges from the literature on tax harmonization is in his consideration of changes in real exchange rates. These exchange rate changes can cause both changes in taxation and uncertainty over income.
Three issues in particular are considered. First, how the liberalization of capital movements affects welfare and its distribution among countries. Second, the way in which these effects are influenced by tax differences and real exchange rate changes. Third, an assessment of the impact of EU tax harmonization policies and EMU policies.
The majority of the book is devoted to developing a model to test these issues. After an introductory chapter, the classical comparative static model of international capital flows is developed. Further chapters extend the model to: multi periods and retained earnings; taxes on income from shares; bonds and personal taxes on income from bonds; and the effect of real exchange rates changes. The penultimate chapter applies the theoretical analysis to the EU and the concluding chapter discusses a range of propositions, assumptions and recommendations.
Important conclusions flow from this analysis, particularly, that the benefits of tax harmonization are limited (0.25 per cent of EU GDP) and the effects of real exchange rate changes are larger (0.83 per cent). However, the results are difficult to unearth and it is not easy to identify within the complex model employed the effects of the assumptions employed on the results. Overall a book only for the economist with a specialist interest in this area.