CONSEQUENCES OF HARMONIZATION OF INDIRECT TAXES FOR LUXEMBOURG

The European Commission has made several proposals and has implemented various measures to achieve a single European market. Some of these p roposals concern the harmonization of value-added taxes (VAT) and exci se duties. Despite the fact that the choice of the proposed level of t he VAT and excise duty rates is based on the current situation in most of the EEC countries, there is much resistance against the proposals. Luxembourg fears that the proposals for indirect tax harmonization of the Commission will have a strong negative effect on its economy. Lux embourg resists the harmonization of indirect taxes mainly for fear of a deterioration of its price competitiveness (due to a wage-price spi ral) and of the decline of nonresident consumption. In this article we try to quantify the effects of tax harmonization for Luxembourg with the use of a sectoral model. The first argument of Luxembourg against indirect tax harmonization seems to be unfounded. Even if the foreign price level declines, the substitution between Luxembourg goods and fo reign goods are limited-at least in the short run. The second argument may be more convincing than the first. In the scenarios the increased excise duty rates on alcohol, petrol, and cigarettes are assumed to r educe the consumption of nonresidents of these products to nil and hav e, therefore, a clearly negative effect on the Luxembourg economy. How ever, the size of the decline in nonresident consumption is unknown an d debatable. The consequences for the government receipts and the gove rnment budget are political. The indirect tax proceeds decrease, but t he receipts from VAT and excise duties are not equal to these proceeds ; for instance, the excise duties are levied jointly with Belgium.