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.

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

History[edit]

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[edit]

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[edit]

Florida large boat sales taxes[edit]

When tax policy is competitive through legal tax avoidance everyone can win. As an example, Florida once taxed all boat sales at 6% with no maximum. As a result, Florida residents did not buy large boats in the state and no sales taxes were collected. In 2010 Florida implemented a maximum $18,000 tax on boat sales. Florida's Revenue Estimating Committee predicted the state would lose $1.6M in tax revenue the first year.[4] A survey was conducted of boat sales for 2011 and found Florida collected $13,486,000 in sales tax revenues, nearly 10 times more than previously collected.[5]

An increase in taxes for the wealthy cost Maryland $1.7 billion in lost tax revenues. This is because many of Maryland’s exiled wealthy moved to Florida, which has no income-tax.[6]

States the single out millionaires for punishment by increasing there taxes always lose. This is by concentrating the jurisdiction’s dependence for revenues on a small group of people, they create a problem with the states open the state’s finances, when those people move to Florida which has no income-tax.[7]

NFL teams that play in higher-tax states have it harder chance of making the playoffs, than NFL teams that play in lower tax income states, because they will fewer games. Highest income-tax rate in a 23 year period (1994 to 2016) won 2.7 fewer games per year that teams in states that do not have in come tax such as Florida. This is because NFL player have to consider the tax implications to consider for which teams they play for. In higher-tax states player ask for a higher gross income to recapture the cost of paying higher taxes.[8][9]

More NBA athletes are singing with teams in states (example Florida and Texas) that do not have income tax, like Miami Heat, San Antonio Spurs and Houston Rockets. As a result some players safe a few million dollars in taxes.[10]

NHL player leave hockey teams located in higher-tax US States and Canadian provinces to low tax jurisdictions. NHL players with no trade clauses who changed teams, picked teams with lower taxes. This makes it more difficult for teams with higher-taxes to skilled players players to win the Stanley Cup. The same goes for dockets and engineers (other professions) that will from from high tax jurisdictions to low tax jurisdictions.[11]

European Union[edit]

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[edit]

Advocates for tax competition say it generally results in benefits to taxpayers and the global economy.[12]

Some economists argue that tax competition is beneficial in raising total tax intake due to low corporate tax rates stimulating economic growth.[13] [14] 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. [15]

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.[16]

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. [17]

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.[18] 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.

See also[edit]

References[edit]

  1. ^ Jensen, Nathan M.; Malesky, Edmund J. (2018). "The Economic Case Against Investment Incentives". Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. Retrieved 2020-03-10.
  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". Cite journal requires |journal= (help)
  4. ^ http://edr.state.fl.us/Content/conferences/revenueimpact/archives/2010/pdf/page%20161-163.pdf
  5. ^ https://apps.lobbytools.com/publisher/files.cfm?fid=17269
  6. ^ https://www.cbsnews.com/news/success-in-the-nfl-what-taxes-have-to-do-with-it/
  7. ^ https://www.forbes.com/sites/miltonezrati/2018/09/24/states-that-single-out-their-millionaires-for-punishment-always-lose/#1b804c525b64/
  8. ^ https://www.cnbc.com/id/48120446/
  9. ^ https://theridgewoodblog.net/in-maryland-higher-taxes-chase-out-rich-study/
  10. ^ https://www.slamonline.com/nba/state-taxes-nba-free-agency/
  11. ^ https://www.atr.org/new-report-shows-skilled-nhl-players-choose-low-taxes/
  12. ^ Mitchell, Daniel (2008). "Tax Competition". In Hamowy, Ronald (ed.). The Encyclopedia of Libertarianism. Thousand Oaks, CA: SAGE; Cato Institute. pp. 500–03. doi:10.4135/9781412965811.n307. ISBN 978-1412965804. LCCN 2008009151. OCLC 750831024. ...low-tax jurisdictions play a valuable and desirable role.
  13. ^ Brill, Alex; Hassett, Kevin (31 July 2007), "Revenue Maximising Corporate Income Taxes: The Laffer Curve in OECD Countries", Working Paper #137, American Express Institute
  14. ^ Hines, James R. (2005), "Do Tax Havens Flourish?", Tax Policy and the Economy, Cambridge, MA: MIT Press, 19: 66, doi:10.1086/tpe.19.20061896
  15. ^ Tax Justice Network – Tax Competition, Aug 26, 2016, retrieved 26 Sep 2016
  16. ^ IFC Forum – Tax Competition, retrieved 12 April 2011
  17. ^ Tax Competition – Was Charles Tiebout Joking? Fools Gold Blog, April 23, 2015, retrieved 26 Sep 2016
  18. ^ 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.

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