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While tax competition is widely regarded as a major fiscal constraint on the welfare state, in fact, very little is known about its real impact. How have advanced industrialized states reacted to the growing mobility of parts of their tax base? To what extent has tax competition resulted in a shift of burdens to less mobile tax bases? In answering these questions, the article identifies the different shape and force of tax competition in different areas of taxation, and the differing ways in which countries have responded. The conclusion is that the pressures of international tax competition are real, but so are countervailing economic and political pressures that work against a general ‘race to the bottom’ in the taxation of potentially mobile bases. At the same time, revenue‐preserving adjustment strategies have prevented large‐scale revenue losses at the price of creating politically more controversial structures of taxation.

This chapter examines recent corporate tax reform activities and the future of corporate income tax. Topics covered include the dividend tax cut of 2003, the 2007 Treasury Conference and Rangel Bill, the corporate income tax and dividend policy, the trend away from corporations and toward alternative forms of business enterprises, and the globalization of corporate tax competition.

This chapter addresses the promotion by many politicians around the world of so-called “tax competitiveness.” It proposes that this ideologically driven phenomenon is reframed as “tax wars” and suggests a set of recommendations for how developing countries can respond to such economic warfare. It also argues for the creation of a think tank whose mission would be to counteract tax competition as an ideology, that is, as a belief system that falsely promotes tax competition as a demand of economic realities. The world understands now that offering tax incentives to tempt investment, hot money, and individual wealth shrinks the tax base, distorts markets, and results in a “race to the bottom” in which nobody (except for the very richest people) wins. The chapter makes a compelling case for ending the race to the bottom since it harms sustainable development while also undermining democratic governments and diminishing human rights.

This chapter considers whether, under which conditions, tax measures that have a regional (sub-national) scope should be treated as State aid and assesses the constitutional implications of this question. Clearly, the regional scope of a measure cannot automatically lead to the conclusion that there is a State aid; to do so would lead to suppressing a crucial aspect of regional autonomy, in contravention to the EU Treaty's renewed commitment to national constitutional identity and regional autonomy enshrined in Article 4(2) TEU. At the same time, however, the standard approach to the definition of State aid, and EU law orthodoxy, would imply the irrelevance of internal constitutional arrangements. While this chapter finds the Court's approach to be consistent with the view that internal market law should not undermine national constitutional identity, it also argues that this solution has important consequences as far as the relationship between State aid, on the one hand, and tax (and regulatory) competition, on the other, is concerned.

The chapter establishes the concept of fiscal autonomy as the normative criterion the book will use to evaluate tax competition. After presenting a taxonomy of the various kinds of tax competition and a discussion of examples to illustrate them, the author shows that tax competition harms fiscal autonomy. More specifically, it undermines the choices political communities make with respect to the size of the state and the level of redistribution. In addition, tax competition tends to exacerbate income inequalities both within countries and internationally. The chapter closes with a discussion of the incentives different types of states face in a world of tax competition.

This chapter examines the problem of overlapping jurisdictions of governmental units in a federal system of government. It explains that fiscal overlapping can occur due to concurrent assignments, interdependence of fiscal revenue bases and expenditure functions, and competition among hierarchically ordered governmental layers and jurisdictions within each layer. Fiscal overlapping can occur both in tax and expenditure functions. This chapter also discusses major issues concerning vertical fiscal disharmony, inter-jurisdictional tax competition and allocative efficiency, and taxation of interstate trade.

The concept of efficiency is used in different ways in economics. First, the practical relevance of models that conclude that tax competition is either Pareto optimal or not is limited, because we do not live in the idealized circumstances of the Pareto frontier. Second, the more relevant criterion of Pareto improvement is silent on the prospect of regulating tax competition because, as previous chapters have shown, the latter has redistributive effects. Third, efficiency as an instrumental value to arbitrate trade-offs between two or more policy goals—a role it plays in optimal tax theory, for example—can in fact be used to show that regulating tax competition is a requirement of efficiency rather than an obstacle to it.

Many claims have been made in recent years, both by the popular media and by prominent economists, that we are living in a period of more aggressive tax planning by multinational corporations (MNCs) and more intense tax competition by governments. This chapter examines and analyzes changes in average effective tax rates in sixty countries to determine the responses of governments to the new global environment. It looks at various areas of MNC and government behavior, including the effective tax rates that MNCs pay to host governments. After reviewing the incentives for tax planning by MNCs from the United States and how these may have changed as a result of the Tax Reform Act of 1986, the chapter compares income-shifting behavior in 1984 and 1992 to see if the reported profitability of controlled foreign corporations (CFCs) has become more sensitive to local tax rates. Finally, it examines the relationship between excess credit expectations and the change in royalties received by the parent and reviews CFC rules that eliminate the benefits of using tax havens.

The introduction gives an overview of the phenomenon of tax competition, as well as the ethical issues it raises. It situates the topic in an interdisciplinary theoretical context. Finally, after commenting on the link between tax competition and the financial crisis, the introduction provides an outline of the argument of the book.

A review of corporate tax policy in the Netherlands is provided, focusing in particular on international aspects and corporate tax competition. Empirical evidence shows that corporate tax policy is important and that it determines the international location of investment and profits of multinational enterprises (MNEs). In terms of tax policy instruments, especially low statutory corporate tax rates—more than narrow tax base definitions—attract internationally mobile business and profits. In addition, ‘smart tax competition’ elements of the Dutch tax system, such as the ‘innovation box’ and generous research and development (R&D) tax credits, help to attract R&D investments that may exert positive spill-over effects on the local economy. Recent tightening of anti-profit-shifting provisions through the European Union’s Anti-Tax Avoidance Directive (ATAD) and the OECD’s Base Erosion and Profit Shifting (BEPS) have not eliminated the incentives to engage in corporate tax competition, and the associated detrimental welfare effects, in consequence, prevail. If appropriately designed, further corporate tax policy coordination will likely be beneficial from a global and a Dutch perspective.

Governments increasingly use their fiscal policy to attract mobile capital from abroad. This tax competition puts a strain on the international fiscal system by undermining the capacity of states to make autonomous fiscal choices and by exacerbating inequalities. The existing regulatory framework is not able to address these challenges. Yet, what considerations should guide our efforts for reform? This chapter argues that a first necessary step consists in understanding the principles that justify the state as the principal locus of fiscal control in the first place. Building on an account of the legitimacy of the state and its fiscal powers, the chapter shows how tax competition is in tension with the principal objectives this account assigns to the state. It then outlines a normative response to tax competition that relies on both reforming jurisdictional rules and redistribution between states.

This chapter offers two explanations for the following disconnect: the first chapter established that source states may have to tax away some of the investment returns earned within their territories in order to receive an equal share of the benefits of cooperation on international capital mobility. One might therefore expect most source states to routinely impose taxes to the fullest extent on all returns to capital that they can plausibly link to their jurisdictions, at least within the bounds of accepted norms. In fact, the opposite is true: many states do not appropriate a share of the cooperative surplus of international capital mobility through source-based taxation, even—perhaps especially—when they keenly rely on inbound capital investment for economic development. In the previous chapter we suggested that this likely means that these states do not receive a fair share of the benefits of tax cooperation. This chapter offers two explanations, namely tax competition and peer pressure to conform to international tax norms, both through treaties and soft law. It examines why and how these factors impede the capacity of source states to tax cross-border income. It also reviews some of the reforms currently under consideration in multilateral fora, now that a confluence of factors has resulted in a willingness even among the most affluent states to consider modifications to traditional principles and norms of tax cooperation.

This chapter describes the multilateral efforts regarding four key concerns of the international community: Prevention of double taxation, fighting “harmful tax competition,” sharing of information, and the “gaps and frictions” between the tax systems of various countries noted by the recent BEPS report. It then asks what, in fact, constitutes the community’s interest in the international tax area, arguing that where tax policy is concerned, there is no clear “textbook answer” regarding the best way to tax internationally. The chapter criticizes two proxies which are often implicitly endorsed in order to evaluate international tax policy: Cooperation among states, and the prevention of market failures. It argues that cooperation, contrary to conventional wisdom, is neither a goal in itself nor is it a good enough proxy for the collective good, and that the elimination of market failures, although indisputably beneficial, may raise a second-best problem.

This chapter introduces regulatory competition as a conceptual framework and factual phenomenon. It discusses the structural preconditions of a ‘law market’, including state suppliers’ incentives to compete at all. It closes with a glance at a number of areas in which competitive dynamics among legislators can be found to operate. Law markets have emerged in a growing number of fields, most prominently in the ‘charter competition’ between US states for being chosen as a place of incorporation, with Delaware being the market leader. Another example that has been under intense academic scrutiny is tax competition: states compete for tax revenue and try to offer ‘tax products’ that appeal to mobile individuals and corporations. Further examples discussed in this chapter are drawn from contract, labour, and insolvency law, as well as dispute resolution.

Instead of summarizing, the conclusion highlights five central insights of the book. First, while the author argues for an effective right of states to tax capital, his argument abstains from recommending any particular rate of capital taxation. Second, the ethics of tax competition defended in the book emphasizes the importance of just institutions rather than appealing to the motivations of individual persons or corporations. Third, parallel to the fiscal context discussed here, the economic interdependence between states arguably creates forms of normative interdependence in other policy fields such as monetary or trade policy. Fourth, of the principles of global tax justice defended in the book, the fiscal policy constraint is likely to be more controversial than the membership principle. Finally, regulating tax competition is not only a requirement of justice but also a matter of sound economic policy.