The benefits of tax competition institute of economic. Like other forms of competition, fiscal rivalry generates positive results. This migration disciplines profligate governments and rewards nations that lower tax rates and engage in progrowth tax reform. Tax competition in the form of harmful tax practices can distort trade and investment patterns, erode national tax bases and shift part of the tax burden onto less mobile tax bases. Tax competition one of the forces shaping tax policy in many countries is the need to maintain a competitive tax system in an increasingly globalized economy. Wildasinb adepartment of economics, michigan state university, marshall hall, east lansing, mi 48824, usa bmartin school of public policy, university of kentucky, lexington, ky 40506, usa received 17 july 2001. Therefore, international tax competition not only drives corporate tax rates to lower levels but might also affect. The trouble with tax competition papers in the ssrn.
Forum on mobility and tax analysis 271 beneficial effects of competition among governments that seem not to have been previously recognized, in part because they represent departures from both the standard tax competition models and tiebout models. The result of this asymmetric tax competition setting is that the capital tax rates may be di. Despite the ubiquity of this term, however, there is no internationally accepted definition of socalled harmful tax competition. As a result, policies that one country may view as harmful may not necessarily be viewed the same way by another, nor found to be harmful, under the circumstances outlined in the report. Oecd project on harmful tax competition does not adequately represent concerns of both developing and developed countries. It reflects different policy priorities by cantonal governments, different preferences by residents, and the recognition that tax competition plays a positive role in keeping tax rates and public spending in check. The council, when adopting the code, acknowledged the positive effects of fair competition, which can indeed be beneficial. Using the tax system to promote developing countries. Harmful effects of tax competition by sahilmodi views 2971 tax competition relates to the phenomenon where a sovereign state having the ability and competence tends to affect the tax system of another country intentionally or unintentionally by incorporating various tax differentials in its domestic tax system. The existence of a harmful tax competition and a fair competition is acknowledged. It shows individual countries need not participate in what is essentially a global race to the bottom, and that. The effects of tax competition 41 internal financial flows within the multinational companies that can be lured to own jurisdictions by attracting those corporate units used for international transfer of profits.
But they are losing business and investments to lower tax jurisdictions where governments let people and businesses keep a higher percentage of their income. Sep 10, 2016 over the last few weeks, a transatlantic war of words has been going on between the us treasury and the european union commission ec over what amounts to harmful tax competition. The report emphasises that governments must intensify their cooperative actions to curb harmful tax practices. My concluding remarks call for more work on the potentially important tradeoffs between the. Find, read and cite all the research you need on researchgate. Over the past few years, policymakers have argued that everything from apples irish tax deal to patent boxes to the luxleaks tax rulings represent harmful tax competition. Preferential regimes can make tax competition less harmful. Tax competition refers to a process in which countries attempt to attract capital or taxable profits, by reducing taxes on. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to. The book begins with a primer on international taxation and then shows why the arguments used by continue.
Tax competition in the form of harmful tax practices can distort trade and. This is the regulatory issue, or rather the institutional intervention in economic behaviour. Tax competition occurs when different countries seek to attract investment and multinational companies, by offering lower tax rates. Often, this means a governmental strategy of attracting foreign direct investment, foreign indirect investment financial investment, and high value human resources. Winners and losers of tax competition in the european union. This mythbuster reveals just how unhealthy this emphasis on tax competition between countries is. Tax competition exists when people can reduce tax burdens by shifting capital andor labor from high tax jurisdictions to low tax jurisdictions. Firm location the basic argument for why tax competition for mobile capital or firms is good goes back to the tiebout hypothesis 1956, which states that competition among jurisdictions for households leads to an efficient provision of local public goods. The topic of harmful tax competition has been for many years one of the main arguments used by international organizations and therefore not only by the eu to assess the compliance of decisions taken by the individual states in relation to the tax advantages with respect to the development purposes and even to the peaceful coexistence. To test the results of the simple tax competition model, we have to regress openness on the tax rate, holding constant the preferences of the government and growth due to exogenous technical progress. In this article we analyze the evolution on direct taxation harmonization within the eu framework, as we consider that the harmful tax competition is a consequence of the lack of harmonization. Cross border shoppers, especially for those products subject to excise taxes, when there are significant differences in the level of those excises. International financial centres ifc forum on tax competition.
Substantial positive effects cantonal autonomy in tax matters is a wellestablished principle. Introduction and background information the world population is approximately six billion people. Daria crisan department of economics university of calgary 2500 university drive n. Using the tax system to promote developing countries yoram margalioth1 those who possess vehicles chat among themselves, while those who possess wheelbarrows chat among themselves also. Tax competition and national tax systems in europe 12 i. Put formally, tax coordination is desirable if the welfare gains from. Implications for global development 2 greg rawlings australian national university offshore finance centres, multilateral initiatives and increasing tax competition this paper examines the selfreported effects on business performance, sustainability and confidence. The oecds report on harmful tax competition 603 their own tax policies, provided that they abide by international standards in so doing. Before discussing hungarian tax competition issues, it is worth drawing up the theoretical background relevant to a hungaryanalysis. It focuses on one particular form of tax competition that is competition at a national level in taxes on corporate source income. This report addresses harmful tax practices in the form of tax havens and harmful preferential tax regimes in oecd member countries and non. Tax competition exists when people can reduce tax burdens by shifting capital andor labor from hightax jurisdictions to lowtax jurisdictions. We can then compare this finding with the result for capital tax revenue.
Fiscal competition has been in the news ever since the oecd launched a campaign against harmful tax competition in 1996. The political attitude of the government towards tax competition 14 a regional and local competition 14 b international tax competition 15 3. In the third place, tax competition can stimulate economic activity, by releasing the investments of one part from the burden of the taxing, which damps them in many ways. Pdf on sep 1, 2017, vladislav burilov and others published the oecd model of harmful tax competition.
In response to the ministers request, the oecds committee on fiscal affairs launched its project on harmful tax competition. Working paper series no 928 august 2008 abstract the governments choices of the corporate tax rate and public investment are interdependent. Both oecd and non oecd governments are concerned at the proliferation of certain tax regimes which, together with the new opportunities opened up by globalisation, increase the potential for distorting economic behaviour and widen the avenues for noncompliance with the tax laws of a taxpayers home country. General introduction some but not all tax competition can be harmful. International finance and macroeconomics program this paper quantifies the macroeconomic effects of capital income tax competition in the european union using a twocountry neoclassical. We also discuss the implications of tax competition for redistributive policies and for policies dealing with risk, and we identify some of the possible empirical implications of 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. Sep 22, 2011 the existence of a harmful tax competition and a fair competition is acknowledged. The effects of tax competition 43 as more capital is invested in the jurisdiction, its marginal product falls and the marginal product of labor rises. Restricting preferential tax regimes to avoid harmful tax competition article in regional science and urban economics 355. The action 5 report is one of the four beps minimum standards.
The topic of harmful tax competition has been for many years one of the main arguments used by international organizations and therefore not only by the eu to assess the compliance of decisions taken by the individual states in relation to the tax advantages with respect to the development. The high tax welfare states want to keep tax rates high so that they can continue to fund their social welfare programs. Usually tax competition refers to corporation tax, but can also include competition on income tax on labour. Tax avoidance, tax competition and globalisation oct200. Most obviously, by offering preferential regimes they can com. Forum on mobility and tax analysis theories of tax competition. Despite not being fully formalized it can be seen that this conclusion hinges on two crucial assumptions. This paper uses a finnish policy intervention to study tax competition among local governments. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighboring municipalities. Harmful tax competition eu dg for taxation and customs union international tax competition. See reuven aviyonah, globalization, tax competition, and the fiscal crisis of the welfare state, 1 harv. The ambiguity and vagueness in its scheme coupled with the highlighted political considerations and opacity spells serious suspicion on its objective to promote global welfare.
Oecd project on harmful tax competition legal service india. An empirical investigation of tax competition between canadian provinces i. Forum on mobility and tax analysis 269 abstract a central message of the tax competition literature is that independent governments engage in wasteful competition for scarce capital through reductions in tax rates and public expenditure levels. The problem facing local authorities is given by the impossibility of increasing the variable g. Tax competition in europe max planck institute munich. The question of tax competition and harmful tax competition implies actually another, a more fundamental question. An emerging global issue 1998, available at dataoecd331 1904184. As i mentioned, tax competition targets mobile economic activities. A package to tackle harmful tax competition in the european union. Over the last few weeks, a transatlantic war of words has been going on between the us treasury and the european union commission ec over what amounts to. This book sets out the benefits that follow when governments promote tax competition. The financial and economic crisis requires leadership and inventive actions in tax policy as much as any other area.
A competitive tax system is a better tax system, nicholas shaxson, ellie mae ohagan. The hightax welfare states want to keep tax rates high so that they can continue to fund their social welfare programs. Tax competition in the form of harmful tax practices can distort trade and investment patterns, erode national tax bases and shift part of the tax burden onto less mobile tax bases, such as labor and consumption, thus adversely affecting employment and undermining the fairness of tax structures. Following the report the oecd began efforts to curtail preferential regimes in. Global tax workshop, finland, 1820 november 2004 1 tax avoidance, tax competition and globalisation.
The commission in its communication a package to tackle harmful tax competition in the european community 24 considered fair competition in tax matters differently from harmful tax competition, as this relates to those measures that may significantly affect the location of business activities in the european union. In different models, tax competition may either limit or increase public expenditures and taxes on mobile factors, with differing welfare consequences. Nov 12, 2004 there is an ongoing debate about tax competition or tax harmonization. Causes, benefits, and risks of business tax incentives. Harmful tax competition taxation and customs union. Feb 14, 2011 was having adequate tax relief for the elderly, which is a major concern among singapore ans. Winners and losers of tax competition in the european union enrique g.
Fiscal competitiveness versus harmful tax competition in. Most governments have laws to prevent cartels and ensure competition, but most governments do not apply the logic of competition policy to their own activities. There is an ongoing debate about tax competition or tax harmonization. Harmful tax competition and beps action point 5 been. This site is powered by keepeek 360, digital asset. In particular, they both respond positively to the other. Restricting preferential tax regimes to avoid harmful tax. Wilson 1991 derives that small jurisdictions are better o. European commission press release details page porto, 27 october 2011 ladies and gentlemen, i am honoured to have been invited to address this distinguished audience today. Forum on mobility and tax analysis theories of tax.
The seminal conclusion is that tax competition leads to an underprovision of public goods. Oct 27, 2011 tax competition can take place via comprehensive measures, such as a general reduction of the corporate income tax rate, or by targeted measures. Harmful effects of tax competition legal service india. Gdp, while the impact on capital tax rates is still negative. The oecd harmful tax competition report university of michigan. It is against this background that the oecds efforts to address harmful tax practices and promote fair tax competition must be viewed. The notion of tax competition in domestic legal and economic science 2. Fiscal competitiveness versus harmful tax competition in the.