Tuesday, September 02, 2008

The meaning of competition

Richard Murphy, a senior adviser to TJN, has been writing about tax competition, which involves "competition" between nation states trying to outdo each other by lowering corporate tax rates so as to attract footloose international capital. We've written plenty about this before. He has put some of the arguments in simple, and stark terms, which are worth highlighting. Here are a couple of excerpts:

"Promoting competition between states is both illogical and an inherently flawed concept: the theory of competition is based on the idea that those participating can fail. We all know that if states fail the consequences for those living within them, around them, and for the world at large are catastrophic. It takes only a moment’s reflection, therefore, to realise that there is no (sound) basis for tax competition."

This is obvious, once you think about it - but it is all too easy for wily operators to bamboozle people into lazily conflating tax competition with market competition. Tax competition doesn't automatically mean the victim states' tax revenues fall to zero: instead the result is that taxes are shifted onto less mobile factors - and that means the kinds of taxes that hit the poorest hardest: notably consumption taxes and taxes on labour.

What is happening here is this:

"Nation states are playing a game of ‘prisoner’s dilemma’ in which the worst outcome, in the form of degradation of the corporate tax base, is the result because countries seem fixated on their need not to cooperate with each other on taxation issues."

Richard adds:

"The ballot box that puts such governments into office is also the only an appropriate mechanism for deciding upon the size of government within a state: the argument that tax competition makes government more efficient is both unproven in fact and fundamentally antidemocratic."

Co-operation is the democratic approach to international taxation: giving nation states and their voters the freedom to choose and negotiate the tax systems they want, rather than having tax choices forced down their throats by tax havens and other aggressive low-tax jurisdictions. What is more:

"Cooperation is fundamentally related to efficiency in taxation. Because people and capital are mobile states need to cooperate with each other to supply the necessary information to ensure that people and companies are properly taxed. If they do not operate and tax evasion becomes rife, respect for the law collapses and ultimately society’s fall apart. . . . the extent of avoidance measures that are necessary to prevent abuse of the international taxation system when operated competitively are so significant that they impose an enormous burden upon all businesses, whether they seek to be tax compliant or not, and this is a cost that society at large cannot afford. Anyone who argues for tax simplification must also argue for tax cooperation or their position is wholly untenable."

Richard Murphy's blog then goes on to offer pointers for how this might be approached. Read on. There are other bogus arguments that are put out there - here's another one which we and Richard have recently written about, which is worth pondering.


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