Heard that countries should ‘compete’ on tax? Wrong

I’ve co-authored an article in the UK’s Guardian newspaper, which is attached to a longer paper, dissecting those calls that we always hear from corporate bosses and many politicians that our countries should have ‘competitive’ tax systems.

In short, these calls are based on simple economic fallacies and it makes no sense at all to aim for a ‘competitive’ tax system – at least in the sense that it is usually understood.  As the Guardian article summarises:

“A myth we’re repeatedly told is that a country must be “tax competitive” in order to support a successful economy. It sounds so reasonable. We’re taught that competition between companies keeps them on their toes and pressures them to produce better products and services, at better prices.

But here’s the problem: competition between companies in a market bears no economic resemblance whatsoever to “competition” between countries on tax. They are completely, utterly different economic beasts.”

I reviewed the theory, the evidence, and the actual practices of businesses, and it turns out that tax competition is always harmful – not just for the world as a whole, where it involves a race to the bottom that leaves all countries worse off – but also for individual countries participating in this race. Even if people understand the first point, it is the second point that is so often misunderstood.

In brief, tax competition always widens economic inequalities inside countries, and it distorts markets, reducing efficiency and increasing large corporations’ monopolistic or oligopolistic pricing power. It undermines democracy, creating a sense of unfairness in the application of tax laws, and by driving tax systems diametrically in the opposite direction from where voters want them to be.

Tax competition drives down effective tax rates on capital – and all the evidence shows that while this does increase inequality, it does nothing to boost economic growth. As effective tax rates on capital (and therefore on wealthier sections of society) are driven relentlessly lower, taxes on less mobile factors such as labour – and therefore poorer members of society – are driven upwards.

From a business perspective, here is Paul O’Neill, former head of the aluminium giant Alcoa and former U.S. Treasury Secretary under George W. Bush:

“As a businessman I never made an investment decision based on the tax code… if you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

Countries should not attempt to ‘compete’ with others on tax. This is clearly significant for every country in Europe.

The published article is somewhat shorter than the original. Here’s one bit that was cut out, but that we’d like to highlight.

“Let’s tackle the economic illiteracy behind those calls for a ‘competitive’ tax system. If you write about it, always put ‘competitive’ in quote marks, to signal that you understand. And when a politician wheels out the ‘C’ word – get them to explain exactly what they mean. Or run for the hills.”

Once again, the Guardian article is here and the longer article here.

And if you want further arguments about why it’s a particularly bad idea right now to cut taxes on corporations, see this article from last year which is even more relevant today than it was then, or this more recent one.