Tax ‘competition’ – which we think can be more accurately called Tax Wars – is the process by which countries, states or even cities use tax breaks and subsidies to try and tempt mobile capital or hot money to come to them. In response to lobbying pressures from wealthy individuals and corporations, which bargain one location off against another to get the best deal, politicians cut taxes and regulations on capital and impose tax hikes and austerity on other sections of society to compensate.
At a global level, this process is a harmful race to the bottom. The process boost inequality, erodes democracy, subsidises unproductive rent-seeking, kills jobs by subsidising capital at the expense of labour, and reduces productivity and economic growth. Tax wars bite all countries – but the processes hurt developing countries particularly hard.
A ‘competitive’ tax system is probably a bad tax system
At a national level, all the evidence shows that it is a mistake to try and create a ‘competitive’ tax system, strange though that may sound.
This is for three big reasons.
First, tax ‘competition’ bears no economic relation to competition between firms in a market. Competition between firms is generally healthy, and serves consumer interests. “Competition” between countries is harmful. The two processes are utterly different: all that they share is a word in the English language: ‘competition’. Yet because because they share this word, many people who haven’t thought too hard about the issues see this as a beneficial process. It is not. The term Tax Wars seems more appropriate: it portrays the process more accurately, and helps convey the harm.
Second, tax is not a cost to an economy, but a transfer within it. Tax cuts for corporations provide subsidies to them, at the expense of another essential wealth-generating mechanism: public spending on roads or courts or education, and s on. So it is not obvious how corporate tax cuts make any country any more ‘competitive’ – whatever ‘competitive’ may mean.
Third, even if cutting taxes does attract investment – and the evidence out there on this point is shaky and conflicted – it attracts exactly the wrong kind of investment. If it is tax-sensitive then, almost by definition, it is the flighty kind: typically short-term, speculative investment that brings few jobs or productive linkages with the rest of the economy, and more likely to be the wealth-extracting kind. If it is the useful wealth-creating stuff bringing jobs and skills transfers, factories and so on — then it is embedded in the local economy and, almost by definition, it will not be scared away by a bit of tax.
This short article explains more.
Latest Tax Blog Posts
Brexit gets worse as London seeks to wriggle free from UK(Blog, Financial Regulation, Tax) No CommentsUpdate: also see Anti-Tax, Anti-Regulation Sirens emerge after Brexit. We have our own particular reasons for [...] Read More →
How the UK’s ‘competitive’ tax system hurts developing countries(Blog, Tax) No CommentsThe British-based non governmental body Actionaid has for some time been at or near the forefront of efforts to lobby for [...] Read More →
New U.S. Research Shows Millionaires Less Mobile than the Rest of Us(Blog, Tax) No CommentsFrom Citizens for Tax Justice, a blog that’s worth reproducing in full, as yet more useful ammunition to wheel out [...] Read More →
A graphical assault on supply-side tax cuts and tax ‘competitiveness’(Blog, Tax) No CommentsThe author of today’s FG blog has just had a piece in the Washington Post entitled Five Myths about Tax Havens in which [...] Read More →
Why “national competitiveness” is like ice cream(Blog, Tax) No CommentsOne our core arguments is that if you shower wealthy people and large corporations with goodies, two things happen. First, [...] Read More →
National Competitiveness: a dangerous obsession, at Max Planck Institute(Blog, Financial Regulation, Tax) No CommentsFrom The Tax Justice Network, on a presentation by FG contributor John Christensen: Highlighting a presentation by [...] Read More →
HSBC opts to stay in ‘competitive’ London. (It was never going to leave anyway)(Blog, Financial Regulation, Tax) No CommentsThere’s been a lot of talk for a long time about a threat from globe-trotting HSBC to move its headquarters from London [...] Read More →
PwC: using ‘competitiveness’ as crowbar to lobby for mining companies(Blog, Tax) No CommentsRecently we wrote an article entitled The Ideologists of the Competitiveness Agenda, in which we fingered the Big Four firm [...] Read More →
Tax treaties for ‘competitiveness’: a ‘poisoned chalice’ for poorer countries?(Blog, Tax) No CommentsThis has been (mildly) adapted from a post written by FG staff for Naked Capitalism and the Tax Justice Network. Tax [...] Read More →
New research: ‘competing’ aggressively on tax reduces growth(Blog, Tax) No CommentsRecently we posted an article entitled New studies: do ‘competitive’ corporate tax cuts boost growth? – to which the [...] Read More →
The Finance Curse and Competitiveness: presentation at Max Planck Institute(Blog, Tax, The Harms, What is competitiveness?) No CommentsThis is the text of a lecture that John Christensen, Director of the Tax Justice Network (TJN), gave at the Max Planck [...] Read More →
New studies: do ‘competitive’ corporate tax cuts boost growth?(Blog, Tax, The Harms) No CommentsUpdate: see our January 5, 2016 article New research: ‘competing’ aggressively on tax reduces growth, a guest blog by Nikolay [...] Read More →
Who runs our countries: us, or global finance? It can be us(Blog, Financial Regulation, Tax, What is competitiveness?) No CommentsStuart Fraser is the former head of the powerful Policy & Resources Committee of the peculiar City of London Corporation, [...] Read More →
UK’s bank levy reforms will cost £4.2bn in tax over 5 years(Blog, Financial Regulation, Tax, The Harms) No CommentsBritain’s summer budget in July 2015 contained a set of reforms to the tax regime for the banking sector which it [...] Read More →
How ‘competitive’ tax and incentive policies hurt small U.S. businesses(Blog, Tax, The Harms) No CommentsRecently we have written about how supposedly ‘competitive’ national policies on tax and the financial sector in [...] Read More →