Recently we have written about how supposedly ‘competitive’ national policies on tax and the financial sector in Britain tend to favour large multinational firms over smaller, more locally-based ones, and how they also tend to lead to less competition in markets too.
This is the result of what we sometimes call the “Competitiveness Agenda”, which pushes the idea that you have to pamper and give subsidies to mobile capital, for fear that it will flee to more hospitable jurisdictions. Of course the firms that are most able to flee (or partly flee) to foreign jurisdictions are naturally the internationally-focused ones – and that usually means larger multinational corporations. The smaller locally-focused ones, which are most rooted in the local economy won’t generally flee.
Update 1, Oct 30: the results of our Freedom of Information Request are now in. See our updated article UK’s bank levy reforms will cost £4.2bn in tax over 5 years.
Update 2: see also How ‘Competitive’ Tax and Incentive Policies hurt U.S. small businesses.
(Now cross-posted at Naked Capitalism)
The ‘competitiveness’ of a country can be taken to mean many things. Many people, such as Martin Wolf or Paul Krugman, have argued forcefully that it is a meaningless or dangerous concept. On another level it’s a question of language: you can make national ‘competitiveness’ mean whatever you like.
But there is a very common use of the term out there — what we are starting to call the Competitiveness Agenda — which accepts a particular meaning for the word ‘competitive.’ This agenda involves special pleading to bestow perks such as tax cuts on capital (or on capital owners), on the basis that if they aren’t pampered they will flee to other more hospitable jurisdictions. (Whether they would actually do this is another matter: the point here is that the scaremongering is often effective in securing pork for capital.)
Yesterday we received an email containing our quote of the day:
“this decades-overdue accounting rule is a historic development of tectonic proportions. It will enable analyses never before possible and vividly tie the opportunity costs of economic development to other public priorities.“
Our emphasis added. We wrote about this recently, but thought we’d underline its importance, with this quote.
This comes from Greg Leroy of Good Jobs First, a non-profit organisation dedicated to exposing and opposing corporate welfare and the race to the bottom between U.S. states on taxes and subsidies. This is of great interest to us at Fools’ Gold, because so many of these subsidies and pork are handed out in the name of ‘competitiveness’ (or some other weasel word.)
The Nobel Prize winning economist George Stigler wrote a famous intellectual history of the concept of perfect competition in the late 1950s (see Box 1, below). The article has subsequently attained canonical status among orthodox economists. It does not mention the contemporary notion of competitiveness once, but as Matthew Watson shows in the latest post for the Fools’ Gold history files, it is full of important implications for those who wish to question the intellectual authority of the modern-day competitiveness agenda.
In particular, Stigler is forced to admit that there is no purely economic basis for supporting the idea of a perfectly competitive economy. His argument that there are still good grounds for keeping up this pretence boil down to straightforwardly political beliefs for wanting to keep the government out of economic life. Despite what will be shown to be their important differences, this is one thing that the theory of perfect competition and the modern-day competitiveness agenda have in common. Both are typically dressed in apparently economic clothes, but each in its own way must be understood as a purely political intervention into public affairs.
We’ve sometimes used the term ‘tax wars’ instead of ‘tax competition’ to describe the process by which countries try to tempt mobile capital by offering tax breaks, prompting others to follow suit in a race to the bottom. Countries often do this in the name of ‘tax competitiveness,’ which as we’ve shown is generally a fools’ errand — even from a purely self-interested national point of view.
Now an Indonesian group called Prakarsa has issued a note entitled Anticipating Tax War in the ASEAN Economic Integration Era, which raises many familiar concerns, particularly tax holidays. As they argue: