The Case for Tax Competition, Fiscal Sovereignty, and Financial Privacy

In recent decades, rising globalization has forced governments to restrain their fiscal appetites. After the Reagan and Thatcher tax rate cuts of the 1980s, other countries were forced to respond with their own tax reforms. The growth of low-tax jurisdictions, or tax havens, has put further beneficial competitive pressure on governments with excessive tax rates. The result is that tax rates on income and capital have fallen significantly, to the great benefit of global investment and growth.

These pro-growth reforms did not come about because governments suddenly realized that low tax rates are better for growth. Instead, politicians cut tax rates to prevent the geese that lay the golden eggs of prosperity from flying across the border.

Alas, there is now a rising big-government backlash against tax competition. Politicians have made unwise promises for ever-growing levels of redistribution, and this is creating pressure for higher tax rates. But higher tax rates are particularly misguided when labor and capital can move to jurisdictions with better policies. This is why high-tax nations are seeking to curtail tax competition and are working through international bureaucracies such as the Organization for Economic Cooperation and Development to create an "OPEC for politicians."