Tax competition
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Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to 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.
Scholars generally consider economic development incentives to be inefficient, economically costly, and distortionary.[1]
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.[citation needed] The gradual process of globalization is lowering these barriers and results in rising capital flows and greater manpower mobility.
Impact
According to a 2020 study, tax competition "primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location."[2] A 2020 NBER paper found some evidence that state and local business tax incentives in the United States led to employment gains but no evidence that the incentives increased broader economic growth at the state and local level.[3]
Examples
European Union
The European Union (EU) also 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.[citation needed]
Criticism
Advocates for tax competition say it generally results in benefits to taxpayers and the global economy.[4]
Some economists argue that tax competition is beneficial in raising total tax intake due to low corporate tax rates stimulating economic growth.[5] [6] 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[citation needed]. 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. [7]
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.[8]
Others point out that tax competition between countries bears no relation to competition between companies in a market: consider, for instance, the difference between a failed company and a
Some observers suggest that tax competition is generally a central part of a
The
Left-wing economists generally argue that governments need
In April 2021,
See also
References
- )
- ISSN 1945-7782.
- S2CID 219145228.
- OCLC 750831024.
...low-tax jurisdictions play a valuable and desirable role.
- ^ Brill, Alex; Hassett, Kevin (31 July 2007), "Revenue Maximising Corporate Income Taxes: The Laffer Curve in OECD Countries", Working Paper #137, American Express Institute
- ^ Tax Justice Network – Tax Competition, Aug 26, 2016, retrieved 26 Sep 2016
- ^ IFC Forum – Tax Competition, archived from the original on 12 October 2013, retrieved 12 April 2011
- ^ Tax Competition – Was Charles Tiebout Joking? Fools Gold Blog, April 23, 2015, retrieved 26 Sep 2016
- ^ Story, Louise (1 December 2012). "As Companies Seek Tax Deals, Governments Pay High Price". The New York Times. Archived from the original on 22 May 2017. Retrieved 6 June 2017 – via NYTimes.com.
- Biden administration's effort to help raise revenue in the United States and prevent companies from shifting profits overseas to evade taxes. Ms. Yellen, in a speech to the Chicago Council on Global Affairs, called for global coordination on an international tax rate that would apply to multinational corporationsregardless of where they locate their headquarters. Such a global tax could help prevent the type of "race to the bottom" that has been underway, Ms. Yellen said, referring to countries trying to outdo one another by lowering tax rates in order to attract business.
External links
- Harmful Tax Competition (EU DG for Taxation and Customs Union)
- International tax competition: globalisation and fiscal sovereignty, Rajiv Biswas, Commonwealth Secretariat, 2002, ISBN 0-85092-688-2
- International Financial Centres (IFC) Forum on tax competition
- A competitive tax system is a better tax system, Nicholas Shaxson, Ellie Mae O'Hagan
- Tax Competition and Inequality – The Case for Global Tax Governance, Thomas Rixen, 2010
- Taxation, Productivity and Prosperity, Martin Wolf, Financial Times, 2012
- "Explore Government Subsidies". The New York Times. 1 December 2012. Retrieved 6 June 2017.