|An aspect of fiscal policy|
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.
When tax policy is competitive with legal tax avoidance everyone can win. As an example Florida used to tax all boat sales at 6% unlimited and most large boats were not sold in the state & therefore paid not taxes. In 2010 Florida implemented a max tax on boat sales of $18,000, Florida's Revenue estimating committee predicted the state would loose $1.6M in tax revenue the first year. A survey was conducted of boat sales for the first year after implementation that revealed Florida collected $13,486,000 in tax revenue, nearly 10 times more than previously collected. This helped Florida's important $17.2B marine industry and the over 202,000 well paying jobs it supports while increasing Florida's tax revenue a Win-win.
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. 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.
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 failed state—and that while market competition regarded as generally beneficial, tax competition between countries is always harmful.
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.
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
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 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.
- 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
- Tax Justice Network - Tax Competition, Aug 26, 2016, retrieved 26 Sep 2016
- IFC Forum - Tax Competition, retrieved 12 April 2011
- Tax Competition - Was Charles Tiebout Joking? Fools Gold Blog, April 23, 2015, retrieved 26 Sep 2016
- 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