ABSTRACT

Most states would like to capture some tax revenue from their support of and participation in the global economy, but they also want to attract foreign investment from the global economy. These two goals pull states in opposing policy directions. On the one hand, it takes financial resources to build and maintain the kind of physical, social, and legal infrastructure necessary to enable market transactions, including direct and indirect investment in local trade and industry. On the other, states often want to avoid imposing tax where doing so might reduce the volume of investment. Going further, states often seek to use their tax systems to lure investment away from states that impose higher tax burdens. The ability to lure investment with a favourable tax climate is a major form of tax competition among states that has always created winners and losers in the global economy, and is therefore always being revisited by global policy leaders. The goal of this chapter is to demonstrate how and why the tax system plays this important function in global investment flows.