Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.
The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.
Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.
The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).
And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.
The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.
P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages policy makers to do the right thing.