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.

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