Comment on chapter 14

How the EMU has influenced tax policy in the Member States is an intriguing, but not easy to answer question. Alworth and Arachi (AA) make an admirable attempt to evaluate the different channels through which the monetary union could affect domestic tax policies, and to gather evidence on their relevance during the ten-year experience of the EMU. this has resulted in an outstanding overview of the state of the art in this field, and a thorough assessment of the policy implications.
In my reading, two channels stand out. First, in so far as the EMU has further enhanced mobility of (financial) capital, Member States can be expected to shift the composition of taxes away from the mobile factor (capital) to less mobile factors (labour, consumption). Second, as EMU members have lost the exchange rate as a policy instrument, the issue arises whether taxes would offer an alternative instrument for accomodating idiosyncratic shocks. In particular, AA discuss the idea that tax policies could be used to achieve real exchange rate adjustments necessary for stabilising the national economy. I will comment on both these channels.