Regular readers know that I am a tireless advocate for tax competition, which exists when governments are encouraged to adopt better tax policy in order to attract/retain jobs and investment. In other words, I want governments to compete with each other because that leads to better policy, just as we get better results as consumers when banks, pet stores, hairdressers, and grocery stores compete with each other.
There is powerful evidence that tax competition has generated very good results in the past 30 years. Top personal income tax rates averaged more than 67 percent back in 1980, but thanks in large part to tax competition, the average top tax rate on individuals has fallen to about 41 percent. Corporate tax rates also have dropped dramatically, from an average of around 48 percent (this data is not as easy to pin down) in 1980 to 25 percent today. And we now have more than 30 flat tax nations today, compared to just 3 in 1980.
That’s the good news. The bad news is that greedy politicians don’t like being constrained by tax competition. Politicians didn’t lower tax rates because they wanted to. They only made their tax systems better because they were afraid that jobs and investment would escape to lower-tax jurisdictions. They resent the fact that tax competition makes it hard to engage in class-warfare tax policy.
That’s why many of these politicians are seeking to replace tax competition with some sort of tax cartel. They want to impose rules on the entire world that will make it hard for taxpayers to benefit from better tax policy in another jurisdiction. In effect, they want some form of tax harmonization, which would create an “OPEC for politicians.” And just as the real OPEC extracts more money from energy consumers, a tax cartel would grab more money from taxpayers.
One aspect of this battle is the way proponents of higher taxes try to demonize so-called tax havens. Many of these jurisdictions are very small, but the smart ones nonetheless defend themselves against the attacks coming from the world’s major welfare states. Here’s a good example. Tony Travers of Cayman Finance, the association representing the financial services industry in the Cayman Islands, recently spoke about the left’s campaign against low-tax jurisdictions.
Travers said he believed the widespread negativity was part of well organised and powerful public relations campaigns driven by onshore Treasury, and supranational and domestic regulatory bodies. British politicians such as Emma Reynolds and former Prime Minister Gordon Brown and even US President Barack Obama were, he said, examples of politicians that were “blame deflecting … and anxious to obfuscate the failures of their domestic regulatory systems … by suggesting that in some way it is the tax or regulatory system of the offshore financial centre that is at fault.” He claimed the problems they were trying to conceal by their demonisation of offshore centres had their source onshore. He described various socialist activist movements, such as the trade unions, major charities such as Oxfam, and Travers arch nemesis, Richard Murphy of the Tax Justice Network as the “Tax Taliban” .
This fight is occurring at all levels. A new scholarly study from the Instituto Bruno Leoni in Italy digs into the academic debate about tax competition. Written by Dalibor Rohác of London’s Legatum Institute, the report debunks the argument that tax competition somehow is economically inefficient.
The first common argument is that tax competition distorts the allocation of mobile factors of production across countries. The second argument recurrent in the literature says that tax competition can reduce tax revenue and endanger the stability of public finances. The troublesome feature of both of these arguments is that they start from the assumption of government benevolence and omniscience. For instance, the first argument presupposes that the initial allocation of capital between the two countries was optimal and that tax competition is driving it away from the optimum. Likewise, the second argument implicitly assumes that the initial amount raised in taxes corresponded to some well-defined social optimum and therefore that tax competition drives revenue below that optimal level. Hence neither of these arguments holds in the light of basic public choice theory which convincingly demonstrates that governments do have a tendency to overspend and overtax.
Rohác cleverly exposes the other side’s statist agenda. He explains that their main argument is based on the idea that different tax rates in different nations will lead to an inefficient allocation of investment. He then points out that there is a pro-growth way and an anti-growth way of dealing with this supposed problem.
…if the problem of capital misallocation is caused by differences in tax rates among countries, than introducing a maximal rate is a solution that would be equally appropriate. …tax competition might well offer a solution to the alleged problem of misallocation of capital caused by tax differentials. If tax competition was a “race to the bottom,” then the final outcome would actually be a tax rate harmonized across countries and harmonized at a rate of zero per cent, thus eliminating capital tax distortions altogether.
[…] wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax […]
[…] some of my right-wing friends also will be hypocrites. They will support fiscal sovereignty but embrace extraterritoriality for abortion […]
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[…] the perspective of a German tax collector, a low-tax jurisdiction is allowed to have fiscal sovereignty, but only on […]
[…] Time to correct the record. But I want to begin by noting that my title was only partly wrong. Oxfam is very much a left-wing organization. In prior columns, I’ve shared critiques of the group’s statist ideology from Tim Carney, Marian Tupy, and Tony Travers. […]
[…] abroad (though that is a nice fringe benefit), but rather because the Reagan tax cuts triggered a virtuous cycle of tax competition. Politicians in other countries had to lower their tax rates because of concerns that jobs and […]
[…] In other words, it’s not just me making these arguments. […]
[…] wrote a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax […]
[…] a study years ago exposing Oxfam’s sloppy methodology on tax competition issues. No wonder they’ve been labeled as being part of the “tax […]
[…] In other words, it’s not just me making these arguments. […]
[…] big picture, as I’ve noted before, is that we want people to have the freedom to cross borders as a means of disciplining politicians […]
[…] big picture, as I’ve noted before, is that we want people to have the freedom to cross borders as a means of disciplining politicians […]
[…] few days ago, I explained why I’m a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and […]
[…] few days ago, I explained why I’m a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and […]
[…] It was a deliberate choice because I view competition among governments as one of the few effective restraints on the greed of the political class. […]
[…] at least when measured on a per-dollar-spent basis? I can’t. That’s why I’ve been fighting the OECD for years, even to the point that the bureaucrats threatened to put me in a Mexican jail for the […]
[…] at least when measured on a per-dollar-spent basis? I can’t. That’s why I’ve been fighting the OECD for years, even to the point that the bureaucrats threatened to put me in a Mexican jail for the […]
[…] of my disdain for international bureaucracies and my belief in sovereignty, you won’t be too surprised to learn that Ms. Pillay’s comments rubbed me the wrong […]
[…] boy with his finger in the dike as part of my ongoing effort to thwart high-tax nations in their attacks against tax competition and tax havens at the “Global Tax Forum” of the Organization for Economic Cooperation and […]
[…] For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty. […]
[…] For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty. […]
[…] For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty. […]
[…] I’m also a bit old-fashioned in my approach to economics. I don’t think people should use the coercive power of government take what they haven’t earned. That’s why I hold international bureaucracies in low esteem. Most of my efforts have focused on the OECD, a Paris-based (gee, what a surprise) bureaucracy that squanders American tax dollars on statist schemes such as their ongoing anti-tax competition campaign that persecutes countries with l…. […]
eHCyf0 Kudos! What a neat way of thinking about it.
[…] Regular readers know that I’m a big fan of tax competition because politicians are less likely to misbehave if the potential victims of plunder have the ability to esc…. […]
[…] Regular readers know that I’m a big fan of tax competition because politicians are less likely to misbehave if the potential victims of plunder have the ability to esc…. […]
[…] will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax […]
[…] will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax […]
[…] will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax […]
[…] A special welcome to Instapundit and NRO readers, and an addendum. This example of people and businesses escaping bad policy by crossing borders is more than just a cheerful anecdote. It is part of a process known as tax competition, which is a powerful force for better policy between both states …. […]
[…] A special welcome to Instapundit readers, and an addendum. This example of people and businesses escaping bad policy by crossing borders is more than just a cheerful anecdote. It is part of a process known as tax competition, which is a powerful force for better policy between both states …. […]
I have always been in favor of harmonious (not harmonized) coexistence amongst nations. But if the world seems to be going down the route of becoming one giant France, then, perhaps, it is time to start also rooting for the Taliban, N. Korea, China, Iran, Cuba and the like. At least, there will be diversity. After all a cornucopia of competing dictatorships may be a better outcome than one Orwellian Global United Nations government modeled after France.
I’m optimistic. And, thank God, that “We just do not seem to able to all get along!”. There’s wisdom in the tower of Babel. I’m an atheist/agnostic but this passage from genesis (about the tower of Babel) seems to hint at God’s free market preferences :
http://en.wikipedia.org/wiki/Tower_of_Babel
[According to the biblical account, a united humanity of the generations following the Great Flood, speaking a single language and migrating from the east, came to the land of Shinar, where they resolved to build a city with a tower “with its top in the heavens…lest we be scattered abroad upon the face of the Earth.” God came down to see what they did and said: “They are one people and have one language, and nothing will be withholden from them which they purpose to do.” So God said, “Come, let us go down and confound their speech.” And so God scattered them upon the face of the Earth, and confused their languages, and they left off building the city, which was called Babel “because God there confounded the language of all the Earth.”(Genesis 11:5-8).]
Have you read Krugman’s work on agglomeration and tax competition? He fails to incorporate public choice theory and, being Krugman, obviously insists that tax harmonization is good, but I think it’s definitely a point for the sub-optimal allocation of capital argument.
While I believe that tax competition is theoretically good, it has its problems. For instance, the tendency of governments to overspend doesn’t go away just because tax competition makes them unable to overtax. As a consequence, nations run up huge debts, ruin economies, and so on. And while multinational corporations may weather economic turmoil well due to their mutinational-ness, those unfortunate enough to be stuck in just one nation have to suffer the consequences. Of course, tax harmonization isn’t the answer to this problem either, but I think the issue is a little more nuanced than simply “tax competition is good” v. “tax competition is bad.”