ABSTRACT
Under conditions of globalization, economic activities cross national borders. Meanwhile, the power to tax is bound to the nation state. Factors of production, most importantly capital, can move to those locations with the lowest tax burden. International factor mobility thus puts national tax systems under competitive pressure. Most research has perceived international tax competition as an independent variable that triggers certain consequences for the nation state. It focuses on national reactions to exogenously given competitive pressures. In particular, it has addressed the question of the nation state’s ability to pursue socially desirable policies under conditions of international tax competition. A common fear is that tax competition will constrain governments’ autonomy to design their fiscal policies according to the preferences of their electorates. Tax competition could lead to a “race to the bottom” of tax revenues and ultimately of social and environmental standards and policies. As will be shown in this chapter, these fears are partially warranted. On the one hand, an overall race to the bottom that has sapped the fiscal power of the state has not materialized until now. Total tax ratios, measuring tax revenue in proportion to national income, have remained stable. On the other hand, tax competition has become a serious constraint on national tax autonomy. While it did not incur a serious drop in total tax revenue, it does force governments to change the structure of their tax systems. As will be shown in this chapter, they had to adjust the ways in which they pursue and balance the central tax policy goals of equity and efficiency. Tax competition does restrict governments’ ability to pursue tax policy according to their own national preferences.
