Tax competition

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Tax competition, a form of regulatory competition, exists when governments use reductions in fiscal burdens to encourage the inflow of productive resources or to discourage the exodus of those resources. Often, this means a governmental strategy of attracting foreign direct investment, foreign indirect investment (financial investment), and high value human resources by minimizing the overall taxation level and/or special tax preferences, creating a comparative advantage.

Contents

Scholars generally consider economic development incentives to be inefficient, economically costly, and distortionary. [1]

History

From the mid-1900s governments had more freedom in setting their taxes, as the barriers to free movement of capital and people were high.[ citation needed ] The gradual process of globalization is lowering these barriers and results in rising capital flows and greater manpower mobility.

Impact

According to a 2020 study, tax competition "primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location." [2] A 2020 NBER paper found some evidence that state and local business tax incentives in the United States led to employment gains but no evidence that the incentives increased broader economic growth at the state and local level. [3]

Examples

European Union

The European Union (EU) also illustrates the role of tax competition. The barriers to free movement of capital and people were reduced close to nonexistence. Some countries (e.g. Republic of Ireland) utilized their low levels of corporate tax to attract large amounts of foreign investment while paying for the necessary infrastructure (roads, telecommunication) from EU funds. The net contributors (like Germany) strongly oppose the idea of infrastructure transfers to low tax countries. Net contributors have not complained, however, about recipient nations such as Greece and Portugal, which have kept taxes high and not prospered. EU integration brings continuing pressure for consumption tax harmonization as well. EU member nations must have a value-added tax (VAT) of at least 15 percent (the main VAT band) and limits the set of products and services that can be included in the preferential tax band. Still this policy does not stop people utilizing the difference in VAT levels when purchasing certain goods (e.g. cars). The contributing factor are the single currency (Euro), growth of e-commerce and geographical proximity.

The political pressure for tax harmonization extends beyond EU borders. Some neighbouring countries with special tax regimes (e.g. Switzerland) were already forced to some concessions in this area.[ citation needed ]

Criticism

Advocates for tax competition say it generally results in benefits to taxpayers and the global economy. [4]

Some economists argue that tax competition is beneficial in raising total tax intake due to low corporate tax rates stimulating economic growth. [5] [6] Others argue that tax competition is generally harmful because it distorts investment decisions and thus reduces the efficiency of capital allocation, redistributes the national burden of taxation away from capital and onto less mobile factors such as labour, and undermines democracy by forcing governments into modifying tax systems in ways that voters do not want[ citation needed ]. It also tends to increase complexity in national and international tax systems, as governments constantly modify tax systems to take account of the 'competitive' tax environment. [7]

It has also been argued that just as competition is good for businesses, competition is good for governments as it drives efficiencies and good governance of the public budget. [8]

Others point out that tax competition between countries bears no relation to competition between companies in a market: consider, for instance, the difference between a failed company and a failed state—and that while market competition is regarded as generally beneficial, tax competition between countries is always harmful. [9]

Some observers suggest that tax competition is generally a central part of a government policy for improving the lot of labour by creating well-paid jobs (often in countries or regions with very limited job prospects). Others suggest that it is beneficial mainly for investors, as workers could have been better paid (both through lower taxation on them, and through higher redistribution of wealth) if it was not for tax competition lowering effective tax rates on corporations.

The Organisation for Economic Co-operation and Development (OECD) organized an anti-tax competition project in the 1990s, culminating with the publication of "Harmful Tax Competition: An Emerging Global Issue" in 1998 and the creation of a blacklist of so-called tax havens in 2000. Blacklisted jurisdictions effectively resisted the OECD by noting that several of the member nations also were tax havens according to the OECD's own definition.[ citation needed ][ needs update ]

Left-wing economists generally argue that governments need tax revenue to cover debts and contingencies, and that paying to fund a welfare state is an obligation of social responsibility. Another argument is that tax competition is a zero-sum game. [10] Right-wing economists argue that tax competition means that taxpayers can vote with their feet, choosing the region with the most efficient delivery of governmental services. This makes the tax base of a state volitional because the taxpayer can avoid tax by renouncing citizenship or emigrating and thereby changing tax residence.

In April 2021, US Secretary of the Treasury Janet Yellen has proposed a global minimum corporate tax rate, to avoid profit shifting by companies to avoid taxation. [11]

See also

Related Research Articles

A tax is a mandatory financial charge or levy imposed on a taxpayer by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behavior aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief. The first known taxation occurred in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as labor equivalent.

A tax cut typically represents a decrease in the amount of money taken from taxpayers to go towards government revenue. This decreases the revenue of the government and increases the disposable income of taxpayers. Tax rate cuts usually refer to reductions in the percentage of tax paid on income, goods and services. As they leave consumers with more disposable income, tax cuts are an example of an expansionary fiscal policy. Tax cuts also include reduction in tax in other ways, such as tax credit, deductions and loopholes.

An ad valorem tax is a tax whose amount is based on the value of a transaction or of a property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event. In some countries, a stamp duty is imposed as an ad valorem tax.

<span class="mw-page-title-main">Indirect tax</span> Type of tax

An indirect tax is a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased. Alternatively, if the entity who pays taxes to the tax collecting authority does not suffer a corresponding reduction in income, i.e., the effect and tax incidence are not on the same entity meaning that tax can be shifted or passed on, then the tax is indirect.

<span class="mw-page-title-main">Taxation in the Republic of Ireland</span> Irish tax code

Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.

Tax harmonization is generally understood as a process of adjusting tax systems of different jurisdictions in the pursuit of a common policy objective. Tax harmonization involves the removal of tax distortions affecting commodity and factor movements in order to bring about a more efficient allocation of resources within an integrated market. Tax harmonization may serve alternative goals, such as equity or stabilization. It also can be subsumed, along with public expenditure harmonization, under the broader concept of fiscal harmonization. Narrowly defined, tax harmonization guided by this policy goal implies — under simplifying assumptions about other policy instruments and economic structure — convergence toward a more uniform effective tax burden on commodities or on factors of production. Convergence may be attained through the alignment of one or several elements that enter the determination of effective tax rates: the statutory tax rate and tax base, and enforcement practices. Perhaps the most widely accepted argument for harmonization involves convergence in the definition of product value or income for tax purposes. Such tax base harmonization would contribute to transparency for economic decision-making and, thus, to improved efficiency in resource allocation. In particular, a common income tax base for multinational companies operating in different jurisdictions would be instrumental not only in enhancing efficiency, but also in preventing overlaps or gaps in tax claims by different countries. Tax harmonization is an important part of the fiscal integration process. Fiscal integration is the process by which a group of countries agree on taking measures that lead to a higher level of fiscal convergence, the ultimate goal being the formation of a fiscal union. Tax harmonization doesn't automatically lead to the formation of a fiscal union, the second part involving much larger scale project that includes fiscal transfers, a fully harmonized legislation and maybe some supervising institutions, beside a long-run agreement. Starting from the definition given to the fiscal integration process, we can easily say that tax harmonization is the process by which a heterogeneous group of countries, federal states or even local governments agree on setting a minimum and maximum level of their tax rates, including also a higher degree of harmonization of tax legislation, in order to attract foreign investors and to encourage local development and investments.

Taxation in the Netherlands is defined by the income tax, the wage withholding tax, the value added tax and the corporate tax.

A tax incentive is an aspect of a government's taxation policy designed to incentivize or encourage a particular economic activity by reducing tax payments.

<span class="mw-page-title-main">Tax policy</span> Choice by a government as to what taxes to levy, in what amounts, and on whom

Tax policy refers to the guidelines and principles established by a government for the imposition and collection of taxes. It encompasses both microeconomic and macroeconomic aspects, with the former focusing on issues of fairness and efficiency in tax collection, and the latter focusing on the overall quantity of taxes to be collected and its impact on economic activity. The tax framework of a country is considered a crucial instrument for influencing the country's economy.

Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. The social welfare function used is typically a function of individuals' utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. Tax revenue is required to fund the provision of public goods and other government services, as well as for redistribution from rich to poor individuals. However, most taxes distort individual behavior, because the activity that is taxed becomes relatively less desirable; for instance, taxes on labour income reduce the incentive to work. The optimization problem involves minimizing the distortions caused by taxation, while achieving desired levels of redistribution and revenue. Some taxes are thought to be less distorting, such as lump-sum taxes and Pigouvian taxes, where the market consumption of a good is inefficient, and a tax brings consumption closer to the efficient level.

Taxation represents the biggest source of revenues for the Peruvian government. For 2016, the projected amount of taxation revenues was S/.94.6 billion. There are four taxes that make up approximately 90 percent of the taxation revenues:

Exchange of Information is an umbrella term which refers to international co-operation in the field of taxation through the exchange of information on taxpayers between tax authorities.

Economic theory evaluates how taxes are able to provide the government with required amount of the financial resources and what are the impacts of this tax system on overall economic efficiency. If tax efficiency needs to be assessed, tax cost must be taken into account, including administrative costs and excessive tax burden also known as the dead weight loss of taxation (DWL). Direct administrative costs include state administration costs for the organisation of the tax system, for the evidence of taxpayers, tax collection and control. Indirect administrative costs can include time spent filling out tax returns or money spent on paying tax advisors.

Taxes provide the most important revenue source for the Government of the People's Republic of China. Value-added tax (VAT) produces the largest share of tax revenue in China and corporate income tax producing the next largest share.

A tax haven is a term, often used pejoratively, to describe a place with very low tax rates for non-domiciled investors, even if the official rates may be higher.

The Netherlands benefits from a strategic geographic location, a world-class economy, a stable political climate, and a skilled workforce. It has a large network of tax treaties, a low corporate income tax rate and a full participation exemption for capital gains and profits. These characteristics, in addition to a favorable tax environment, make Netherlands one of the most open economies in the world for multinational corporations (MNCs).

In Slovakia, taxes are levied by the state and local governments. Tax revenue stood at 19.3% of the country's gross domestic product in 2021. The tax-to-GDP ratio in Slovakia deviates from OECD average of 34.0% by 0.8 percent and in 2022 was 34.8% which ranks Slovakia 19th in the tax-to-GDP ratio comparison among the OECD countries. The most important revenue sources for the state government are income tax, social security, value-added tax and corporate tax.

A destination-based cash flow tax (DBCFT) is a cashflow tax with a destination-based border-adjustment. Unlike traditional corporate income tax, firms are able to immediately expense all capital investment. This ensures that normal profit is out of the tax base and only super-normal profits are taxed. Additionally, the destination-based border-adjustment is the same as how the Value-Added Tax treat cross-border transactions—by exempting exports but taxing imports.

<span class="mw-page-title-main">Ireland as a tax haven</span> Allegation that Ireland facilitates tax base erosion and profit shifting

Ireland has been labelled as a tax haven or corporate tax haven in multiple financial reports, an allegation which the state has rejected in response. Ireland is on all academic "tax haven lists", including the § Leaders in tax haven research, and tax NGOs. Ireland does not meet the 1998 OECD definition of a tax haven, but no OECD member, including Switzerland, ever met this definition; only Trinidad & Tobago met it in 2017. Similarly, no EU–28 country is amongst the 64 listed in the 2017 EU tax haven blacklist and greylist. In September 2016, Brazil became the first G20 country to "blacklist" Ireland as a tax haven.

<span class="mw-page-title-main">Global minimum corporate tax rate</span> Proposed international tax scheme

The global minimum corporate tax rate, or simply the global minimum tax, is a minimum rate of tax on corporate income internationally agreed upon and accepted by individual jurisdictions in the OECD/G20 Inclusive Framework. Each country would be eligible for a share of revenue generated by the tax. The aim is to reduce tax competition between countries and discourage multinational corporations (MNC) from profit shifting that avoids taxes.

References

  1. ↑ Jensen, Nathan M.; Malesky, Edmund J. (2018). The Economic Case Against Investment Incentives. pp. 41–57. doi:10.1017/9781108292337.004. ISBN   9781108292337 . Retrieved 2020-03-10.{{cite book}}: |website= ignored (help)
  2. ↑ Mast, Evan (2020). "Race to the Bottom? Local Tax Break Competition and Business Location". American Economic Journal: Applied Economics. 12 (1): 288–317. doi:10.1257/app.20170511. ISSN   1945-7782.
  3. ↑ Slattery, Cailin R; Zidar, Owen M (2020). "Evaluating State and Local Business Tax Incentives" . National Bureau of Economic Research. Working Paper Series. doi: 10.3386/w26603 . S2CID   219145228.
  4. ↑ Mitchell, Daniel (2008). "Tax Competition". In Hamowy, Ronald (ed.). Tax Competition. The Encyclopedia of Libertarianism. Thousand Oaks, CA: SAGE; Cato Institute. pp. 500–503. doi:10.4135/9781412965811.n307. ISBN   978-1412965804. LCCN   2008009151. OCLC   750831024. ...low-tax jurisdictions play a valuable and desirable role.
  5. ↑ Brill, Alex; Hassett, Kevin (31 July 2007), "Revenue Maximising Corporate Income Taxes: The Laffer Curve in OECD Countries", Working Paper #137, American Express Institute
  6. ↑ Hines, James R. (2005), "Do Tax Havens Flourish?", Tax Policy and the Economy, 19, Cambridge, MA: MIT Press: 66, doi: 10.1086/tpe.19.20061896
  7. ↑ Tax Justice Network – Tax Competition, Aug 26, 2016, retrieved 26 Sep 2016
  8. ↑ IFC Forum – Tax Competition, archived from the original on 12 October 2013, retrieved 12 April 2011
  9. ↑ Tax Competition – Was Charles Tiebout Joking? Fools Gold Blog, April 23, 2015, retrieved 26 Sep 2016
  10. ↑ Story, Louise (1 December 2012). "As Companies Seek Tax Deals, Governments Pay High Price". The New York Times . Archived from the original on 22 May 2017. Retrieved 6 June 2017– via NYTimes.com.
  11. ↑ Rappeport, Alan (2021-04-05). "Yellen calls for a global minimum corporate tax rate". The New York Times . ISSN   0362-4331 . Retrieved 2021-04-05. Treasury Secretary Janet L. Yellen made the case [...] for a global minimum tax, kicking off the Biden administration's effort to help raise revenue in the United States and prevent companies from shifting profits overseas to evade taxes. Ms. Yellen, in a speech to the Chicago Council on Global Affairs, called for global coordination on an international tax rate that would apply to multinational corporations regardless of where they locate their headquarters. Such a global tax could help prevent the type of "race to the bottom" that has been underway, Ms. Yellen said, referring to countries trying to outdo one another by lowering tax rates in order to attract business.
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