Old and New Europe

When capital and labor are mobile, governments are prompted to compete -- even lowering tax rates. Today's WSJ lead editorial ("Germany's Epiphany"; link only works for subscribers) provides some data to corroborate the point. An accompanying table shows national and local tax rates for 12 OECD countries for 2000 and 2005; ten of twelve (excluding UK and Japan) had lowered tax rates -- even though politicians and their programs everywhere surely "needed" the money.

"When eight formerly communist countries in Central Europe joined the EU last May, German Chancellor Gerhard Schroder was among the earliest and loudest critics of their tax-cutting ways. Low tax rates 'are not the way forward' for Germany's new eastern neighbord in the EU, he warned on the eve of the Union's enlargement.

"Well, what a difference a year makes. Last week Mr. Schroder announced plans to cut the federal corporate tax to 19% from 25% -- which just happens to be the corporate tax rate of Poland, one of the new EU members Mr. Schroder was so critical of last spring."

"Old" Europe learning from "new" Europe.