Tax competition

Tax competition or institutional competence is a governmental or jurisdictional strategy to promote decentralization and limitation of public power and attract foreign direct investment and qualified personnel. It consists of minimizing the level of taxation, and generating competition among public institutions or governments in the same way that private institutions and companies do.

In the past, different governments had greater freedom to establish a high level of taxes as a barrier to the free movement of capital and workers. The process of globalization is lowering these barriers, resulting in greater international mobility of labor and, above all, of capital (favoring tax evasion and avoidance).

In this situation, different countries tend to lower tax levels to discourage skilled workers and investors from moving to other countries with lower tax levels. However, taxes are only part of a complex formula to describe the competitiveness of a nation. Other criteria such as the cost of labor, labor market flexibility, levels of education, political stability, stability of the legal system and efficiency are equally important.


The reactions of the different governments tend to focus on "stick and carrot" policies:

  • reduction of taxes to people and corporations;
  • tax holidays;
  • elevation of barriers to capital movement;
  • prohibition of companies that hide in tax havens to opt for public contracts;
  • political pressures to countries with lower tax levels to harmonize these.

Apparently, defensive policies only have short-term effects. The most proactive reactions to fiscal competition consist of promoting other policies favorable to growth and reforming the tax system.

In the European Union

The European Union (EU) is a special case in the study of tax competition. The barriers to the free movement of capital and workers were reduced to practically nonexistent. Some countries (eg Ireland) used their low levels of corporate taxes to attract large amounts of foreign investment, while using EU funds to pay for the necessary infrastructure (roads, telecommunications, net EU taxpayers (like Germany) are strongly opposed to economic transfers for infrastructure to countries with low tax levels.The EU integration has been exerting pressure also for the harmonization of consumption taxes.The EU member countries must have a VAT minimum of 15% (normal rate), and there is a limit to the number of products and services that can be included in the reduced rate.These rules do not prevent some people from taking into account the VAT difference when buying some goods (p. (eg cars) The factors that contribute to harmonization are the single currency (euro), the growth of electronic commerce and geographical proximity.

The political pressure for fiscal harmonization extends beyond the borders of the EU. Some neighboring countries with special tax regimes (such as Switzerland) have been forced to make concessions in this regard.

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