Tax Competition
TAX COMPETITION: AN ENGINE FOR PROSPERITY
Tax Competition is the tax-cutting influence that countries exert on one another. 1 Tax competition is practiced by sovereign nations and their dependencies when they set their own tax rates and rules.
Tax competition brings many benefits:
- It is a check on government's ability to raise taxes which in turn requires governments to spend more prudently.
- It boosts the economic welfare of a nation and results in greater employment.
- It results in more productive capital investment by business.
- Tax Competition causes capital markets to be more efficient.
Because of globalization and the easy flow of capital across borders, legislators and policymakers are pressured to respond to the tax cuts of other countries so as to remain competitive and not shrink the tax base in their own countries. Leaders of many socialist high-tax western states have resisted tax cutting because the thought of losing tax revenues is abhorrent. Instead leaders have attacked tax competition through bloated bureaucratic organizations such as the United Nations, the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund, and The European Union. They have used tax harmonization as a challenge to tax-competition.
Notwithstanding attacks by the US and Europe, competitive tax rates have a tremendous influence "on the level of business investment, employment, productivity, wages, and incomes" 2 in a country. One of the best examples of the benefits of tax competition is Ireland. Highly taxed and double-digit unemployment, Ireland was one of the poorest countries in western Europe. In the 1990s Irish politicians cut personal tax rates down to 42 percent, capital gains tax rate was slashed to 20 percent, and the corporate income tax rate was reduced to a low rate of 12.5 percent.
These reduced tax rates resulted in what is known as the Irish Miracle. The economy of Ireland expanded at an average rate of 7.7 percent annually during the 1990s, employment blossomed, and foreign investment rose dramatically. Today the Irish people have the second highest standard of living in the European Union.
High tax rates lead to the flight of domestic and foreign investment and result in low growth rates.
TAX COMPETITION FOR THE SOVEREIGN INDIVIDUAL
"Skilled workers, wealthy individuals, and private savings are also part of ...tax competition." 3
Many nations have implemented low personal tax rates and changes to their immigration policies. This has resulted in the re-location of many skilled educated workers and entrepreneurs.
Factors that have influenced competition for entrepreneurs, wealthy individuals, and educated skilled labor are several:
- Many Eastern European nations have lifted emigration restrictions, thus increasing the pool of migrants.
- The changing structure of the economy in western nations has effectively demolished the idea of lifetime employment with one company. The changing structure of compensation such as pension plans, savings plans, and salaries have made workers more mobile and willing to work abroad.
- Travel and communications costs have fallen dramatically and has made overseas employment more attractive.
- The passage of trade agreements and tax treaties.
- Immigration policies designed to attract highly skilled foreign workers.
The implementation of tax breaks to attract skilled and knowledgeable foreign immigrants. Thus giving high income workers an incentive to move from high-tax jurisdictions to low-tax jurisdictions.
VIDEOS
1. Chris Edwards and Daniel J. Mitchell, Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend it, (Washington DC: The Cato Institute, 2008) p. 3.
2. Government of Canada, Department of Finance, "Budget 2000," February 28, 2000, p.18, www.fin.gc.ca/budget00/tax/tax1e.htm.
3. Chris Edwards and Daniel J. Mitchell, Global Tax Revolution, p. 7.
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