International Tax Competition

Globalization is transforming separate national economies into a single world economy. This process is occurring through rising trade and investment flows, greater labor mobility, and rapid transfers of technology. As integration increases, individuals and businesses are gaining freedom to take advantage of foreign economic opportunities. Individuals have more choices about where to work and invest, and businesses have more choices about where to locate their production, research, and headquarters facilities.

Many governments have responded to rising globalization with tax cuts to attract investment and spur growth. Individual income tax rates have plunged in recent decades, and more than two dozen nations have replaced their complex income taxes with simple flat taxes. At the same time, nearly every major country has slashed its corporate tax rate, recognizing that business investment has become highly mobile in today’s economy. That is the good news.

The bad news is that some governments and international organizations are trying to restrict tax competition. A battle is unfolding between those policymakers who want to maximize taxation and those who understand that competition is leading to beneficial tax reforms. If plans to stifle tax competition gain ground, growth will be undermined, governments will grow larger, and economic freedom will be curtailed.