Arguments in Favor of Tax Competition
Before the advent of globalization, every country in the world was working in a vacuum when it came to taxes. This is because the companies which operate in these countries did not have any choice when it came to tax rates.
Their only choices were to accept the tax rates or to stop production. If they did not like the tax policy of the country, they could undertake political protests.
However, there was nothing else they could do to increase their own financial gain. In economic terms, it can be said that the government is the monopoly supplier.
Hence, like all monopoly suppliers, the government has no incentive to reduce its costs, and hence inefficiency becomes the norm.
All this changed with globalization. After globalization, countries were free to incorporate and operate in different parts of the world. If they did not like the tax policy of a country, they could simply move to another country. This policy of free movement of capital gave rise to tax competition.
Tax competition means that countries have to compete with each other in order to get companies to incorporate and operate within their boundaries. Since countries now had to attract companies, a wave of rationalizations and tax cuts followed. There are several benefits to tax competition. Some of them have been explained in this article.
The good thing about tax competition is that once a few governments adopt this model, the others do not have a choice. This is what has happened in the modern world.
After most of the western governments adopted tax competition, other developing countries had to follow suit. Also, countries cannot stop tax competition unilaterally.
They have to get other governments to agree. For instance, European governments have been trying to harmonize their tax rates to eliminate tax advantages but have not been able to do so.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.