Professor Greg Mankiw: If You Value Inidividual Liberty, then Protect, Promote, and Preserve Competition Between Governments

Other than my experiment dealing with corporate taxation, the first video I narrated for the Center for Freedom and Prosperity dealt with the issue of tax competition.

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.

Simply stated, in the absence of competitive pressure, politicians will over-tax and over-spend until the welfare state collapses of its own weight. Some of them self-destruct anyhow because sometimes politicians can’t resist myopic policy decisions even when they know the house of cards will come tumbling down. Greece is a good example, though this cartoon shows the same phenomenon in a more amusing fashion.

But if we want to save other nations from that fate, we need competition among governments so politicians have to worry that the geese with the golden eggs can fly away to nations with better policy.

This is why protecting, promoting, and preserving tax competition is my top issue. Heck, I’ve even run the risk of being thrown in a Mexican jail because of my efforts to defend the right of jurisdictions to compete with decrepit welfare states by implementing pro-growth fiscal policy.

With this as background, you won’t be surprised to learn that I’m a big fan of what Greg Mankiw wrote this weekend in the New York Times.

Here’s some of his column, beginning with the (hopefully) obvious point that competition is what drives an economy and provides benefits to consumers.

Most everyone agrees that competition is vital to a well-functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate.

He then explains that the same principle of competition can protect the interests of taxpayers just as it protects the interests of consumers.

For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet. The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

He also points out that federalism is a way of reducing the monopoly power of central governments.

Conservatives applaud such competition among governments. They are skeptical of government power, and they see competition as a check on its potential abuse. Because people and capital will flee from places where their tax dollars do not deliver commensurate value, government officials have little latitude to pursue personal agendas that are substantially adverse to any group of citizens. This logic leads naturally to the principle of federalism. Because exiting a state or locality is easier than leaving the nation, some policy options should be available to state and local governments but not to the federal government. The founding fathers were no fools.

Not surprisingly, the class-warfare crowd despises competition among governments. That’s why they want fiscal policy determined by Washington – and also why they support the pernicious efforts of international bureaucracies to cripple tax competition among nations.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.” Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals.

Mankiw’s column is worth sharing, so please send this post to friends and colleagues. I’d also recommend these powerful short statements by Dan Hannan and Godfrey Bloom, both British members of the European Parliament. And here’s another video on the topic from the Center for Freedom and Prosperity, but you get to listen to someone more appealing than me.

But if you like listening to me, for inexplicable reasons, here’s my three-part video series on the value of tax havens as part of the tax competition process.