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Tax competition
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.
Scholars generally consider economic development incentives to be inefficient, economically costly, and distortionary.
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.
Governments can respond in varied ways to mitigate the adverse effects of tax competition. Governments can take unilateral action, make bilateral agreements, or rely on an overarching tax authority:
According to a 2020 study, tax competition "primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location." 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.
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]
Advocates for tax competition say it generally results in benefits to taxpayers and the global economy.
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Tax competition
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.
Scholars generally consider economic development incentives to be inefficient, economically costly, and distortionary.
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.
Governments can respond in varied ways to mitigate the adverse effects of tax competition. Governments can take unilateral action, make bilateral agreements, or rely on an overarching tax authority:
According to a 2020 study, tax competition "primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location." 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.
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]
Advocates for tax competition say it generally results in benefits to taxpayers and the global economy.