OECD Admits That Tax Competition Leads to Better Tax Policy

The bureaucrats in Paris are a schizophrenic bunch. The OECD’s Committee on Fiscal Affairs seeks to thwart tax competition in order to prop up Europe’s uncompetitive welfare states, yet the professional economists in the organization frequently write about the benefits of lower tax rates and the liberalizing impact of tax competition – a division discussed in this article. Perhaps there is hope that the economists will triumph in this internal battle. A new report from the OECD notes how tax competition is lowering tax rats and creating more efficient tax systems. There is an unfortunate sentence expressing concern that tax competition could reduce income redistribution, though this may have been inserted to placate some of the European governments that dominate the OECD:

Globalisation, especially the increased mobility of capital and highly-skilled labour, fosters greater tax competition. While corporation tax is only one among many factors that shape firms’ location decisions, it has a significant impact. Most OECD countries have cut their corporate tax rates over the past decade, some by a considerable amount. Similarly, empirical evidence indicates that lower income tax rates can be attractive to highly skilled migrants. Many governments have also reduced the top marginal rate of income tax, which is an important determinant of the effective tax rate for highly skilled workers. On average across OECD countries, the top marginal income tax rate fell from 45% in 1995 to 37% in 2005. … Globalisation also encourages the pursuit of efficiency gains in tax systems. To the extent that globalisation encourages a move to less elastic tax bases, it should improve the efficiency of tax systems. … On the other hand, tax competition could potentially reduce the ability of the tax system to contribute to the achievement of income redistribution objectives.

The Wall Street Journal likes the new report, focusing on the evidence that lower corporate tax rates are generating a Laffer Curve effect. This editorial makes the key point that the goal of lower tax rates is not to increase government, but rather to increase growth and opportunity – which is why it calls for further rate reductions:

Globalization skeptics claim the world is locked in a tax-rate race to the bottom. Luckily, they’re right – taxes are falling. But this trend also makes government finances better, strengthens economies and creates jobs. In “Making the Most of Globalization,” released yesterday, the OECD draws a direct link between lower tax rates and fiscal well-being. Over the past decade, most OECD countries cut corporate taxes, some by a great chunk, and saw average state revenues go up – not just in absolute terms. …corporate-tax proceeds have also risen as a percentage of GDP. So there’s plenty of room to cut further. By scrapping tax exemptions and lowering headline rates, governments have attracted investment, boosted growth and corporate profits, and improved tax compliance. It’s a nice demonstration of the Laffer curve at work.