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.

 

  1. #1 by Victor on April 20, 2013 - 9:33 pm

    These are only myths in uneducated people´s minds.

    But when it comes to politicians and the people that peddle this nonsense, the myth is that they don´t know what they are doing or they do it out of good faith.

    The wealthy never agreed on their own volition to the creation of the middle class. It was imposed on them as a lesser evil in response to the threat of Communism and as part of the post-Depression, post Wars “consensus”.

    They have been picking at it ever since, but only now they see the post-Great Recession as a reverse opportunity to finish dismantling the social and tax policies that make possible a sustainable middle class.

    The ideologues for the wealthy would be perfectly content to return to pre-fordist capitalism or even feudalism. You don´t have to be marxist to understand these debates are not new.

  2. #2 by jon livesey on April 21, 2013 - 12:07 am

    Ireland.

  3. #3 by jon livesey on April 21, 2013 - 12:16 am

    In case my first comment is too cryptic, I’ll spell it out. The fallacy used by the author of this column is the well-known fallacy of composition.

    A simple example is this: if one person stands up at a football game, that person gets a better view, but if everyone gets up, no-one has a better view than anyone else.

    Similarly for taxation – and for devaluation, by the way. If one nation in a trading area reduces taxes, it gets an advantage by attracting investment, and Ireland is a good example. But if every nation drops their corporate tax rate to Irish levels, then no-one gets an advantage.

    In other words, it really can be an advantage to reduce taxes to attract investment and create jobs, so long as everyone doesn’t follow suit, but we don’t have to worry about that, since most countries have other economic strengths that they used to attract investment. The UK, for example is right next to Ireland, but can attract enough inward investment without competing on tax rates.

    So, a lot of pompous stuff about what’s basically a non-issue.

    • #4 by Michael on April 21, 2013 - 9:03 pm

      Every nation can’t drop their corporate tax rate to Irish levels, because their tax systems are different. Irish corporate tax has always been low, it was raised from 10 to 12.5 during the 90s. There are business rates as well and other forms of tax on companies so it is not as simple as a rate. The rate is not even relevant because big companies in higher tax rate economies don’t have to pay the headline figure and many big companies based in Ireland choose to pay tax elsewhere. It is time people stopped comparing apples and oranges and just accepted that tax rates are different due to different historical, cultural and systematic requirements; and will remain different.

  4. #5 by John Bunzl on April 21, 2013 - 8:10 am

    The real question is: what do we DO about destructive tax competition? Dispelling myths is helpful and certainly the easy part. The harder part is action. For some ideas, please see http://www.simpol.org

  5. #6 by mustafa copur on April 25, 2013 - 1:26 pm

    as you know tax is the importen things for the one steta. how you can get tax.first european union countries they heva to contag with finland interior ministry or swedish or norway interior ministry that what kind of tax system will useful every european ather members steta.as you know my 17 years fighting this bitch secret service in europa they teach me many things how one steta got tax from puplic.in iscandanivian countries specialy they earn money tax from PIMP WORK.means which they sell their doughter officialy in oslo in stockholm in helsinki olsa they are nummer one homo anemy of jesus criest bitch nation bacteir wc bacteria for eu culture and oll the humanity.how l can rispect one bitch iscandanivian homo bitches in the world.look after their feeding spy kurdish in oslo in goteborg in helsinki 40 tazund life killed both side in kurdistan what kurdish nation got it in kurdistan only without civililation poor economi what our spy got it in iscandanivian countries rich very rich this is reality of civilation from bitch iscandinavian for our land kurdistan.look from their extremism they even put my village where l born in kurdistan region in turkey out of kurdish map this kind of bitch rasist,as you know jesus didnt say man can live with faith this faitles even their extremism some times they threathing me with some kind of medicin in my food that l canbe confuse be withouth control which l will not know what l am doing.if kurdistan will be meda by the iscandinavian spy doughter seler homo l will even not regonize my country kurdistan.if we meda our land fredom our self l will regonize kurdistan as country.17 years l refuse rich from those ten feca of cheater from swedish finland and norway homo besuca for me my mather culture and demokrasi and human rights importen.today my asking european comminity ask to iscandinavian homo pimp how european earn more money from tax
    in the nema of jesus l ask you
    biji kurdistan our lord help my nation from those oll spy
    mustafa copur
    village.dayakpinar
    city.sivas
    town.gurun
    born deta,20.06.1969
    riligion jesus will be answer those homo nation in iscandinavia in jwesus nema amen
    adres.hvalsmoen transitt asylum camp
    city.hønefoss
    norway

  6. #7 by karol zimmer on April 29, 2013 - 9:01 am

    not only irelnad.
    uk (thatcher), usa (reagan), estonia, latvia, lithuania (currently), slovakia (till 2012)… -all of these rasied their growth rate significantly after cutting taxes. netherlands is antoher country showing benefits of very competitive tax regime.

    or take the red and blue belts within the USA: compare Texas and California. Are you really saying that Americans suffer because they have tax and regulatory competition among US states? Hahahahahahaha.

    you cannot find many successfully growing economies with high taxes. you can find a lot of them with low taxes. tax competition is helping both the tax subjects and, in mid term, the states.

  7. #8 by Virgil Marsette on May 19, 2013 - 12:04 pm

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