Arguments in Favor of Tax Competition
February 12, 2025
Hedge funds are considered to be the riskiest of all asset classes. Almost everybody considers hedge funds to be completely speculative in nature. Add to this the fact that Securities and Exchange Commission (SEC) allows only accredited high net worth individuals to invest in such funds and they start to look all the more suspicious. […]
The Shortcomings of an IPO The initial public offer model works well for big companies. However, as far as smaller start-ups are concerned, IPOs are not a viable or efficient means of raising capital. This is because there is a huge transaction, as well as legal fees that are associated with IPOs. Hence, as long […]
What Is Rework? Rework is that part of the final produce which has not been accepted by the client because it does not meet the required specifications. However, those specifications can be met by working on the item once again. Hence the name rework. What Is Spoilage? Spoilage is also that part of the final […]
Bankruptcy proceedings are often long drawn processes. The reason behind this is simple. If a company has to come out of bankruptcy, it has to get all its creditors to agree to a reorganization plan. The creditors are divided into classes based on the seniority of their debt. Each class is then expected to vote […]
The growth story of Tesla is no ordinary story. It is a testimony to what a start-up can achieve if it’s given an adequate amount of funding and good leadership guidance. It would be wrong to classify Tesla as a start-up company now. Tesla is now one of the most popular automobile companies in the […]
Proponents of the free market generally believe that competition is good for the economy. They argue in favor of the competition every time.
Hence, it is natural for them to feel that competition in taxes is also good. The general argument is that competition forces the governments to rationalize and become more efficient.
However, there are many economists in the world who believe that the general rules of competition cannot be applied to taxation. This is because taxation is a totally different kind of economic subject.
Hence, what may be good for the market, in general, may not be good when it comes to setting up a tax system. This is the reason why they have listed down some of the negative points which tax competition brings along.
This article explains some of the common arguments which are made against tax competition.
A country does not have the option to avoid tax competition if its peers are indulging in it. Economists have studied tax wars between different nations, wherein each kept lowering the rate to undercut the other.
In the end, one party gains by a marginal amount. However, both participants lose much more, and the real winner is the corporation who benefits by playing the nations off against one another.
Lower revenues mean that the country will have to either lower their expenses, or they will have to pick up even more debt. Now, when governments want to cut expenses, obviously they cannot reduce expenses on infrastructure or any other service that corporations require.
This is because that would also trigger the flight of capital. As a result, governments are forced to lower the level of services offered to their civilians.
The education and health facilities of the country start taking the hit. This is also a form of wealth transfer from the poor to the rich.
Any shortfall induced by not taxing capital is made whole by increasing the taxes on labor. This is what is happening in most developed countries in the world.
The tax on corporations has reduced from 35% to 24% in the past five years. However, during the same period, the taxes on the poor have either stagnated or steadily increased.
Tax competition leads to regressive tax systems around the world, which actually defeats the purpose of the competition.
Hence, if the government of a nation tries to increase taxes after inducing them to invest under the pretext of lower taxes, they would just exit the nation.
This is detrimental for the economy as multinationals do not invest in infrastructure assets, which form the basis of the growth of any economy.
When the system is designed, several loopholes are created, which allow bigger corporations to get away after paying a lower effective rate of tax.
As a result, the bigger corporations end up having a tax advantage over the smaller business. This tax advantage allows them to drop prices and gain even more market share.
This leads to even more revenue for them in the future. This technique has been used by companies like Wal-Mart and Amazon, who have gained an unassailable price advantage over smaller firms because of tax competition.
It is ironic that states strike these deals with mega-corporations in order to improve the lives of their citizens. However, over the long term, the end up hurting their livelihood.
Hence, over a period of time, tax competition exacerbates the wealth gap between the rich and the poor. The advantages are reaped by the rich, whereas the costs are borne by the poor worldwide.
Hence, economists argue that tax competition ends up widening the wealth gap, which is the exact opposite of what this law intends to do.
The bottom line is that many countries have seen their tax revenues dwindle. This is particularly true of countries that are in the vicinity of other tax havens.
As a result, these countries want to eradicate this idea of tax competition. They are of the opinion that tax competition is a failed economic experiment, which is costing the global economy dearly.
However, the problem is that no country can end tax competition of its own. They will have to team up with several other countries before a critical mass is reached, and tax competition is eradicated, which is unlikely to happen in the short term.
Your email address will not be published. Required fields are marked *