Tax

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

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  • 16Jun

    How the UK’s ‘competitive’ tax system hurts developing countries

    (Blog, Tax) No Comments
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  • 27May

    New U.S. Research Shows Millionaires Less Mobile than the Rest of Us

    (Blog, Tax) No Comments
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  • 21Apr

    A graphical assault on supply-side tax cuts and tax ‘competitiveness’

    (Blog, Tax) No Comments
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  • 11Mar

    Why “national competitiveness” is like ice cream

    (Blog, Tax) No Comments
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  • 24Feb

    National Competitiveness: a dangerous obsession, at Max Planck Institute

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  • 15Feb

    HSBC opts to stay in ‘competitive’ London. (It was never going to leave anyway)

    (Blog, Financial Regulation, Tax) No Comments
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  • 10Feb

    PwC: using ‘competitiveness’ as crowbar to lobby for mining companies

    (Blog, Tax) No Comments
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  • 22Jan

    Tax treaties for ‘competitiveness’: a ‘poisoned chalice’ for poorer countries?

    (Blog, Tax) No Comments
    This has been (mildly) adapted from a post written by FG staff for Naked Capitalism and the Tax Justice Network.  Tax [...]  Read More →
  • 05Jan

    New research: ‘competing’ aggressively on tax reduces growth

    (Blog, Tax) No Comments
    Recently we posted an article entitled New studies: do ‘competitive’ corporate tax cuts boost growth? – to which the [...]  Read More →
  • 11Dec

    The Finance Curse and Competitiveness: presentation at Max Planck Institute

    (Blog, Tax, The Harms, What is competitiveness?) No Comments
    This is the text of a lecture that John Christensen, Director of the Tax Justice Network (TJN), gave at the Max Planck [...]  Read More →
  • 01Dec

    New studies: do ‘competitive’ corporate tax cuts boost growth?

    (Blog, Tax, The Harms) No Comments
    Update: see our January 5, 2016 article New research: ‘competing’ aggressively on tax reduces growth, a guest blog by Nikolay [...]  Read More →
  • 10Nov

    Who runs our countries: us, or global finance? It can be us

    (Blog, Financial Regulation, Tax, What is competitiveness?) No Comments
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  • 04Nov

    UK’s bank levy reforms will cost £4.2bn in tax over 5 years

    (Blog, Financial Regulation, Tax, The Harms) No Comments
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  • 29Sep

    How ‘competitive’ tax and incentive policies hurt small U.S. businesses

    (Blog, Tax, The Harms) No Comments
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