Tax Competition is a Virtue
Competition is a virtue. Whether you are an athlete, a business, a salesperson, a nonprofit organization, a state or a country, competition makes you work harder at what you do, and to focus on the most important things.
That doesn’t mean that everyone necessarily likes competition. They might prefer to be insulated from competition by a coach, a boss, a regulation, a law, or even by an ocean.
Oceans and distance used to protect governments from competition at least somewhat, but in today’s global economy, governments are forced to compete for labor, capital, and access to markets—in other words, they have to compete for a tax base. Because in a global economy, taxable labor and capital can easily move to a more hospitable tax regime.
Governments HATE having to compete for their tax base. When a state or a country lowers its taxes, it spoils the high-tax and big-spending party. That’s why high-tax countries in Europe complain about tax competition, and it’s why they berate Ireland for its low tax policies that have turned Ireland into an economic “Celtic Tiger.” It crashes Europe’s high-tax and big spending party.
It was thus very discouraging to find in President Obama’s recent Framework for Business Tax Reform concerns about “the continuing race to the bottom in international tax rates.” This sounds like language straight out of the EU tax authorities, rather than from an American president. Americans pride ourselves on our willingness to compete, and on our confidence that the American producer can compete with anyone, anywhere. But this administration sounds like it has given up the idea of competing internationally, and instead is looking for structures to insulate the United States from beneficial tax competition.
No wonder. On April 1st, the United States will have the highest business tax rates of any developed economy. We’re the Bacchus at the high-tax, big-spending party. So it’s sadly understandable that this administration feels more in league with those who seek to eliminate tax competition than with those who thrive under such competition.
The United States should not to try to stifle international tax competition, but rather should get back in the game by lowering business tax rates and freeing U.S. businesses to compete internationally. It’s true that no one can out-compete American producers—if only our government will get out of the way.