Richard Murphy tells us that it is not possible for there to be anything other than harmful tax competition. All such competition must, by definition, be harmful. This relies upon an argument that insists that the correct and best method of provision is monopoly. For as he says, competition means there must be winners and losers. The logic therefore being that we should not have competition – in order to prevent there being losers – and this so clearly and obviously being tosh that we can reject it out of hand.
Any even scanty look backward at the 20th century shows that the economies in which there was market competition did better than those in which there was not. From Paul Krugman we’ve had the point that the Soviet Union managed an increase in total factor productivity of entirely nothing over the course of its 70 years existence. From Brad Delong, calling upon Bob Solow, we’ve that the living standards of the average person in the market economies increased by a factor of perhaps 8 over the century.
Competition works that is. As standard economics also tells us it does. It works by those who are less efficient producers losing out to those who are more so as producers. The winners being the consumers, who are able to gain their consumption desires from the more efficient producers. Yes, this also applies to matters international. Indeed, it’s one of the arguments in favour of trade itself. Given that mediocrity is pervasive and highly available domestically then opening the borders to trade means consumer access to those more efficiently produced products. Which forces domestic TFP to rise.
There isn’t anything which says this isn’t also true of governments.
Ever since John Christensen and I have known each other, which we can easily date to our being co-founders of the Tax Justice Network in 2002, we have asked a very simple question. It is this.
If it is accepted that there is harmful tax competition might you please define what benign tax competition looks like?
The reason for asking should be obvious, I hope. It is that all competition is necessarily premised on the idea of there being winners and losers. That means even benign tax competition must create those who gain and suffer loss from it.
And why should that be, is our question? What is the reason why some, who are most likely to be the owners of internationally mobile capital, should gain from arbitraging the democratically chosen tax systems of countries and so by implication undermine democracy and the rule of law in the places where they decide to avoid (at best) their obligations? What is ever benign about this process of undermining the public goods that democracy and the rule of law represent?
We could never find any satisfactory answer to that question. We do not think that there is one. As a result we do not think benign tax competition exists. There is, in fact, only the harmful variety. All tax competition is, then, to the detriment of society. That is why we still oppose it.
It is possible that a government will tax in an economically inefficient manner. Actually, we know that they will because we can see that they do. Transactions taxes are “bad” taxes, in that they have high deadweight costs. Land taxes are “good” taxes in that they have low deadweights. So, if we wish to tax housing wealth, which we probably do, we should do this through a land value tax and not a stamp duty tax upon transactions. That this isn’t the tax system we have shows that governments can be inefficient in their taxation policies.
Cool – so, competition moves people from less productive to more productive methods. We can observe that we have less productive – in the sense that they destroy more economic activity per unit of revenue raised, those higher deadweights – taxes, competition among taxation bodies would move us to the more productive methods.
Among those taxes – Mirrlees gained his Nobel for work on this – which are unproductive, inefficient, or have high deadweights, are taxes upon capital and corporations. Tax competition between nations will thus have the effect of lowering these “bad” taxes and increasing reliance upon “good” taxes. Upon economic rents, upon consumption, upon incomes.
That is, the winners from tax competition will be the citizenry. Because in the absence of deadweights – or their being lower – the citizenry will be living in a larger economy, in a richer place, for the same level of taxation and thus provision of public services.
More specifically, given that corporate taxation is one of these “bad” taxes because of the high deadweights then competition among nations with respect to corporate tax rates pushes them down, thus benefiting the citizenry. Because their public services are delivered with the destruction of less economic activity through the process of collecting taxation to pay for it.
Murphy’s wrong, but then we knew that. The particular cause of his error here is that he doesn’t understand who benefits from competition. It’s consumers – which, with respect to government, is the citizenry. Presumably he wants to limit competition between governments in order to make governance worse – would certainly accord with many of his other suggestions.