Tax competition

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty European Union FTT
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria Canada China Colombia France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Namibia Netherlands New Zealand Norway Pakistan Palestinian territories Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay

Tax competition, a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources. Often, this means a governmental strategy of attracting foreign direct investment, foreign indirect investment (financial investment), and high value human resources by minimizing the overall taxation level and/or special tax preferences, creating a comparative advantage.

Some observers suggest that tax competition is generally a central part of a government policy for improving the lot of labour by creating well-paid jobs (often in countries or regions with very limited job prospects). Others suggest that it is beneficial mainly for investors, as workers could have been better paid (both through lower taxation on them, and through higher redistribution of wealth) if it was not for tax competition lowering effective tax rates on corporations.

Some economists argue that tax competition is beneficial in raising total tax intake due to low corporate tax rates stimulating economic growth.^[1] ^[2] Others argue that tax competition is generally harmful because it distorts investment decisions and thus reduces the efficiency of capital allocation, redistributes the national burden of taxation away from capital and onto less mobile factors such as labour, and undermines democracy by forcing governments into modifying tax systems in ways that voters do not want. It also tends to increase complexity in national and international tax systems, as governments constantly modify tax systems to take account of the 'competitive' tax environment. There is also little evidence that lower (or higher) taxes promote economic growth.

It has also been argued that just as competition is good for businesses, competition is good for governments as it drives efficiencies and good governance of the public budget.^[3]

History

From the mid 1900s governments had more freedom in setting their taxes, as the barriers to free movement of capital and people were high. The gradual process of globalization is lowering these barriers and results in rising capital flows and greater manpower mobility.

Impact

With tax competition in the era of globalization politicians have to keep tax rates “reasonable” to dissuade workers and investors from moving to a lower tax environment. Most countries started to reform their tax policies to improve their competitiveness. However, the tax burden is just one minor part of a complex formula describing national competitiveness. The other criteria like total manpower cost, labor market flexibility, education levels, political stability, legal system stability and efficiency are also important.

Governments typically react with "carrot-and-stick" policies such as:

reduction of both personal and corporate income tax rates
tax breaks/holidays (i.e. time limited tax exemptions)
favorable tax policies for non-residents
raising the barriers to free movement of capital
not allowing companies domiciled in tax havens to bid for public contracts
political pressure on lower tax countries to “harmonize” (i.e. raise) their taxes

Application

The European Union (EU) illustrates the role of tax competition. The barriers to free movement of capital and people were reduced close to nonexistence. Some countries (e.g. Republic of Ireland) utilized their low levels of corporate tax to attract large amounts of foreign investment while paying for the necessary infrastructure (roads, telecommunication) from EU funds. The net contributors (like Germany) strongly oppose the idea of infrastructure transfers to low tax countries. Net contributors have not complained, however, about recipient nations such as Greece and Portugal, which have kept taxes high and not prospered. EU integration brings continuing pressure for consumption tax harmonization as well. EU member nations must have a value-added tax (VAT) of at least 15 percent (the main VAT band) and limits the set of products and services that can be included in the preferential tax band. Still this policy does not stop people utilizing the difference in VAT levels when purchasing certain goods (e.g. cars). The contributing factor are the single currency (Euro), growth of e-commerce and geographical proximity.

The political pressure for tax harmonization extends beyond EU borders. Some neighbouring countries with special tax regimes (e.g. Switzerland) were already forced to some concessions in this area.

Criticism

The Organisation for Economic Co-operation and Development organized an anti-tax competition project in the 1990s, culminating with the publication of "Harmful Tax Competition: An Emerging Global Issue" in 1998 and the creation of a blacklist of so-called tax havens in 2000. Blacklisted jurisdictions effectively resisted the OECD by noting that several of the member nations of OECD also were tax havens according to the OECD's own definition.

Left-wing economists generally argue that governments need tax revenue to cover debts and contingencies, and that paying to fund a welfare state is an obligation of social responsibility. Right-wing economists argue that tax competition means that taxpayers can vote with their feet, choosing the region with the most efficient delivery of governmental services. This makes the tax base of a state volitional, because the taxpayer can avoid tax by renouncing citizenship or emigrating and thereby changing tax residence.

Related terminology

References

↑ Brill, Alex; Hassett, Kevin (31 July 2007), "Revenue Maximising Corporate Income Taxes: The Laffer Curve in OECD Countries", Working paper #137 (American Express Institute)
↑ Hines, James R. (2005), "Do Tax Havens Flourish?", Tax Policy and the Economy (Cambridge, MA: MIT Press) 19: 66
↑ IFC Forum - Tax Competition, retrieved 12 April 2011