Tax Wars

Tax warsTax ‘competition’ – more accurately known as Tax Wars – is the process by which countries, states or even cities use tax breaks and subsidies to attract investment or hot money. In response to ‘competitive’ pressures they cut taxes on wealthy individuals, or on corporations – then make up the difference by hiking taxes on poorer sections of society. Inequality rises.

At a global level, this process is a race to the bottom – and it has no redeeming features. It is always harmful, particularly for larger economies. As well as boosting inequality it 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 it hurts developing countries particularly hard.

A ‘competitive’ tax system is 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.

See our short article exploding the myth that it is a good idea to have a ‘competitive’ tax system.

See our full report entitled Ten Reasons to Defend the Corporation Tax.

See John Christensen discussing tax wars (2m:53).

As a businessman I never made an investment decision based on the tax code. if you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do 
things because of inducements.”
-Paul O’Neill, ex chairman of Alcoa

 

Why is this? For two big reasons.

First, tax ‘competition’ bears no economic relation to competition between firms in a market. They are utterly different economic beasts. All that these different processes share is a word in the English language: ‘competition’. Because of this word, many people see this as a beneficial process. We prefer the term, tax wars, which is more like trade wars or currency wars than it is like competition – and which more accurately conveys 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.

Even if cutting taxes does attract investment – and the evidence out there on this point is very shaky – it attracts exactly the wrong kind of investment: the flighty kind with few productive linkages with the rest of the economy.

The fantasy of beneficial tax ‘competition’

The theory that tax wars are a good thing rests heavily on a paper written in 1956 which relies on unspeakable assumptions – for example, that hordes of perfectly informed citizens flit in great shoals from one country to another, every time the tax rates change. This and other similarly unworldly assumptions in the paper are  nonsense.

“The notion of the competitiveness of countries, on the model of the competitiveness of companies, is nonsense.”
– Martin Wolf, chief economics commentator, Financial Times

Although the arguments can get quite complicated, not least because of the large number of academic studies out there straining the morass of evidence to show that tax wars provide benefits, our short article provides a useful introduction to the issue. We will soon publish research providing a more comprehensive overview of the issues, and explaining why much of the academic literature on this topic is entirely missing the point.

Language is crucial. We urge all to stop referring to ‘tax competition’ and talk about ‘tax wars’ instead. After all, the process is far more akin to currency wars or trade wars than it is to competition between firms in a market. If you really must use the term tax competition, then at least put ‘competition’ in quote marks, to signal that you have understood the fallacies.

Latest Blog Posts

Highlights before 2014

Tax wars highlights

April 2013 – See our article (also here) outlining the key issues and the evidence.

Dec 2013 – Billions of Tax Dollars Later, No New Jobs for New York, Tax Analysts.

Good Jobs First – excellent U.S. resource with a wealth of evidence on tax wars inside the United States. See in particular The Job Creation Shell Game: Ending the Wasteful Practice of Subsidizing Companies that Move Jobs From One State to Another, Jan 2013.

2006 – A TJN briefing paper on tax competition (available here)

Older stories

Dec 2013 – Developing countries and tax incentives: OECD says it like it is. Original here.

Nov 19 – Huge exodus of wealthy from California after state tax hikes

July 12, 2013 – Financial regulation: internationally competitive = domestically dangerous. Original here.

Jun 25, 2013 Derivatives WMD: lobbyists seeking to remove ‘burdensome’ safety catches. Alternative here.

* HIGHLIGHT * – April 18, 2013 – Skewering the myth of tax competition. Guardian article here, longer analysis here and here.

March 12 – Financial Times finds evidence of huge flight of rich after French tax hikes

Oct 11, 2012 Memo to the UK: the only way to win a race to the bottom is not to play. Original here.

Aug 20, 2012 – Vietnam and how tax incentives undermine policy processes

March 30, 2012 – Corporate Taxation – The Next Race to the Bottom

Jan 26, 2012 – IMF: race to the bottom on tax in developing world. Original here.

Jan 10, 2012 – Tax Competition and Inequality:The Case for Global Tax Governance, new paper by Thomas Rixen. Original here.

Aug 5, 2011 – US study: tax flight is a myth

Aug 4, 2011 – PWC seems caught lying in US tax competition case. Original here.

Jan 2011On the Dole, corporate style. David Cay Johnston on new research about the proliferation of tax incentives, and wasteful competition between jurisdictions to supply them.

Dec 2010 – Is tax competition harming developing countries more than developed? A seminal paper by Mick Keen and Alejandro Simone. Original here. Reprinted with permission of Tax Analysts. Copyright 2004.

Oct 2010: UK VAT abuse and the music industry: how tax havens undermine markets.

Sept 2010: Africa Tax Spotlight: the tax competition edition.

Tax wars: new terminology for tax competition.

Dr Thomas Rixen, In Need Of A Fix: Double tax avoidance rules as the institutional foundation of tax competition in Tax Justice Focus, July 2008 >

New paper in European Tax Policy journal: Deadlocked European Tax Policy – Which Way Out of the Competition for the Lowest Taxes? By Christian Kellermann and Andreas Kammer, Feb 2009 >

Extra insights, March 2009 in this blog by Richard Murphy from the G20 meet: how tax havens undermine democracy. >

Slide show of presentation by Richard Murphy in the City of London: how tax competition affects developing countries. November 2008. >

A paper by Bruno Gurtner and John Christensen on tax competition, presented in Mexico, October 2008. >

Richard Murphy writes on the merits of tax co-operation, August 2008 >

TJN on tax competition and co-operation in FT Economists’ forum, May 2008, with update here >

Edmund Valpy Fitzgerald of Queen Elizabeth House at Oxford University outlined some principles and challenges associated with tax competition in this 2002 paper

Oct 2006 Tax Research on the UK’s stable corporate tax take, amid falling tax rates

2005 – Joel Slemrod, University of Michigan, Tax Competition with Parasitic Havens

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