Let's say we have 10 countries, with an identical GDP of 100 billion, and 10% flat tax rate. Let's say they agree on what's the minimum decent level of public services (health care, education, roads, wars abroad, prisons, car makers and bank bailouts...), and it cost just these 10% GDP raised by taxes.
On day 1, everything goes smooth: everyone needs 10 billions, has 10 billions, spends them. Now, a country decide to lower its tax rate to 5%. Taxable activities move massively to this country, their GDP soars to 300 billions: they've now 15 billions of income tax, that's great for them; but other countries have only got 9.4 billion left, they're below their bare minimum income. They'll have to choose between suppressing some public services, and protect themselves against the dumping countries (i.e. make it artificially impractical for companies of the dumping country to do business in the rest of the union).
Now, if the dumping country is much smaller than the others, it can do some dumping without hurting other, bigger countries too much with the drain. That's why dumping countries are usually small ones: the smaller the country, the more we let it get away with.
The dumping mechanisms encourage to lower taxes, at the expense of reduced public services. In some countries, limiting public services is ideologically considered a Good Thing (and for some reason, people don't realize that wars and prisons are public services). But limited public services are correlated with higher stress, and higher crime rates. That's not the lifestyle most Europeans want: so we have to protect our taxes. Don't forget that there is already a strong control feedback on taxes: voters don't enjoy paying them, so most taxes that can be suppressed or lowered under acceptable conditions are cut ASAP.
Let's say we have 10 countries, with an identical GDP of 100 billion, and 10% flat tax rate. Let's say they agree on what's the minimum decent level of public services (health care, education, roads, wars abroad, prisons, car makers and bank bailouts...), and it cost just these 10% GDP raised by taxes.
On day 1, everything goes smooth: everyone needs 10 billions, has 10 billions, spends them. Now, a country decide to lower its tax rate to 5%. Taxable activities move massively to this country, their GDP soars to 300 billions: they've now 15 billions of income tax, that's great for them; but other countries have only got 9.4 billion left, they're below their bare minimum income. They'll have to choose between suppressing some public services, and protect themselves against the dumping countries (i.e. make it artificially impractical for companies of the dumping country to do business in the rest of the union).
Now, if the dumping country is much smaller than the others, it can do some dumping without hurting other, bigger countries too much with the drain. That's why dumping countries are usually small ones: the smaller the country, the more we let it get away with.
The dumping mechanisms encourage to lower taxes, at the expense of reduced public services. In some countries, limiting public services is ideologically considered a Good Thing (and for some reason, people don't realize that wars and prisons are public services). But limited public services are correlated with higher stress, and higher crime rates. That's not the lifestyle most Europeans want: so we have to protect our taxes. Don't forget that there is already a strong control feedback on taxes: voters don't enjoy paying them, so most taxes that can be suppressed or lowered under acceptable conditions are cut ASAP.