Deutschland im Steuerwettbewerb (Germany Faces Tax Competition)

The 1997 German tax reform, which is of the tax-cut-cum-base-broadening type, has favorable welfare effects for Germany as a player in the international tax competition game, but it does so in part for paradox reasons. The reform favors investment projects whose returns are taxed according to the source principle and it hurts projects whose returns are taxed according to the residence principle. It is shown theoretically and empirically that both effects will narrow the existing gaps between the social return and the social opportunity cost of investment, thus increasing social welfare from a national point of view.