New Thinking in Political Economy series
Edited by Andreas Bergh and Rolf Höijer
Chapter 7: Fiscal Competition and the Optimization of Tax Revenues for Higher Growth
Victoria Curzon-Price Fiscal competition has been in the news ever since the OECD launched a campaign against ‘harmful tax competition’ in 1996. Nor is it likely to disappear any time soon. Instead, it is likely to intensify, as more and more governments resort to lower taxes to stimulate their economies. Is all tax competition harmful, or is it possible to distinguish between harmful and beneﬁcial tax competition? Is it likely to result in a shifting of the tax burden from internationally mobile to immobile factors of production? And is even beneﬁcial tax competition – supposing that it can be deﬁned – not likely to end in a ‘race to the bottom’ – a race to cut taxes to such low levels that the very existence of the state as we know it might be threatened? The ﬁrst part of this chapter will discuss the virtues of competition in general, and what ﬁscal competition in particular might yield, on both the positive and the negative side. We will suggest that the criterion of sector-speciﬁc misallocation of resources should be used to distinguish between harmful and beneﬁcial tax competition. Section 7.2 will look at various tax regimes, which have sometimes been criticized by the OECD and EU, in the light of this criterion. Section 7.3 will discuss the pros and cons of ﬁscal competition in general, while Section 7.4 will judge the actual extent of ﬁscal competition today (2006) and its apparent impact on tax revenues and economic growth. Although...
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