adopted (= participation exemption and end of the imputation system) has been also a reaction
to the difficulties in coping with elusive practices and harmful competition.
(ii) Financial capital incomes - The original Razin and Sadka prophecy (1991) of this tax
basis progressive vanishing has proved to be untrue without full mobility of assets and within
imperfect capital markets. Inside EU Countries tax rates on interest unambiguously decreased
during the last decade by about ten points (from nearly 46 per cent in 1990 to slightly less
than 37 per cent in 2000), but this has been mainly due to the substitution of final withhold-
ings for the inclusion in the income tax basis. The reduction of dividend rates was far less and
statistically insignificant. The whole system of income capital taxation has diverged and be-
come less neutral (Gorter and de Mooj 2001). Inside the large majority of countries the shift
to low rate withholdings on interest enlarged a distortional spread with dividends taxation.11
National models of interest taxation became more uneven (Joumard 2001; van de Noord and
Heady 2001). Partial (Luxembourg, United Kingdom, The Netherlands) or total (Denmark,
Germany, Spain, Ireland) inclusion in the income tax basis at marginal rates of up to 60 per
cent are in force as well as final withholdings (Austria, Belgium, France, Finland, Greece, It-
aly, Portugal, Sweden) at rates going from 12.5 per cent (Italy) to 30 per cent (Finland and
Sweden). Up to mid January 2003 non residents were generally exempt even if this was not
formally the case in Greece and Portugal. The EU agreement of 21 January 2003 is based
mainly on monitoring and information exchanges to allow taxation in the country of residence
(except for Austria, Belgium and Luxembourg). The adopted solution is well informed to the
better residence principle (vs. that of origin). It results however are somewhat deprived by the
increasing exclusion of total interest income from progressive income tax base just over seen.
Further one must hope that monitoring and information exchanges will be effective and really
cooperative. Needless to say tax regimes for dividends and capital gains are still more frag-
mented than for interests. The same claimed “general” shift away from the imputation system
(whatever its very doubtful merits) up to now has been realized by a minority of European
Countries (van de Noord and Heady 2001). For income capital taxation these are the poor re-
sults of tax competition on the most mobile bases.
(iii) Social contributions and income tax - At the early 1990s the European average tax
wedge on labor was already at about 50 per cent. The implicit rate was at 35 per cent, some
11This bad result somehow could be avoided by adopting a “true” “Dual income tax system” which should tax
any kind of capital income at the same rate. As to 1998 this solution was however not yet adopted by all the
same Nordic Countries (van de Noord and Heady 2001).