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The Free-Market Case Against Tax Competition

Those who believe in the power of competition to produce optimal market outcomes tend to view taxation, regulation, and other forms of state intervention as hurdles to growth and prosperity. But by arguing in favor of "tax competition" among advanced economies, they are supporting a status quo that encourages monopoly.

LONDON – The global race to cut corporate tax rates accelerated in 2018. According to the OECD’s latest annual review of tax policies across developed economies, the average rate of taxation on corporate profits has fallen from 32.5% in 2000 to below 24% today.

This trend is understandable. With private-sector investment remaining stubbornly weak, governments are desperate to hold on to whatever piece of the pie they can. It is better to tax firms lightly and keep them in your jurisdiction than it is to forego that revenue entirely.

After all, other things being equal, firms that are considering building a new factory or other facility will be attracted to countries with a more preferable tax regime. Likewise, firms facing a higher corporate tax rate in one country may decide to move their operations elsewhere. Or, rather than transferring personnel and disrupting supply chains, they may find a way to register profits in a lower-tax jurisdiction – typically by moving some head office functions there.