Harmful Tax Practices: To Brook or to Ban?

The Code of Conduct for business taxation may, diametrically opposed to its intention, aggravate tax competition between EU Member States. The reason is that, by restricting harmful tax practices, it induces cuts in generic tax rates that may reduce tax revenue. If one believes that governments benevolently maximize utility, then this should lead to additional underprovision of public goods. We show within a standard tax-competition framework that this scenario is more likely to unfold with a higher upper bound for nondistortionary taxes, a higher responsiveness of mobile capital to tax rate differentials, and a smaller endowment of internationally mobile capital.