International Tax Competition

Worried about the tax base rivalry that goes on in your region? Maybe there is an even bigger version of this problem that all of us should be worried about--this is the competition among nations for tax base.

As economic integration brings all nations closer together, foreign economic opportunities are placed within everybody's reach. With that, business investment and location decisions become more sensitive to taxation issues. Revenue-hungry governments have decided to throw up some roadblocks to keep more for themselves. How? Rising tax competition has caused many governments to penalize residents and businesses from enjoying as much tax benefit from their investments abroad. With the lousy economy we have today, there is growing concern that we may resort to even more "defensive tax policy measures" that in the long run add greater inefficiency to the economy and discourage businesses from growing their markets internationally.

Tax policy issues are quite complex. Make no mistake about that. Inter-governmental tax competition here in the U.S. is a big deal and getting bigger as different levels of government duke it out for taxes. Nations are doing the exact same thing. This is an important issue for economic developers to look at because changing national tax policies have a impact on state and local taxes and the competitiveness of states and local areas for economic development.

Taxing capital is considered by most economic developers to be a bad idea. It prevents us from building the productive side of the economy. If we are not careful, we could see a new wave of tax policy changes by nations across the globe designed to help them hold onto their wealth and wealth-creating entities (people and businesses). These actions could prevent economic development from moving onto a globe level, which is where it needs to head in the future.

Want to know more? Click here to download a recent report by the Cato Institute on this subject.