Big Debate: Is Tax Competition Beneficial Or Harmful To Global Economic Stability?

Organisation for Economic Co-operation and Development (OECD)

Tax competition plays a complex role in the global economy. Some competition can encourage countries to adopt tax policies that support investment, promote certainty for taxpayers, and raise productivity and growth. Competition can also inhibit growth and erode tax bases, risking losses of tax revenues needed to fund public services. Tax policies designed to foster investment may not deliver promised economic benefits, yet have the effect of spurring a ‘race to the bottom’ imposing pressure on countries to compete by giving up additional tax revenue. Similarly, competition to extract tax revenue from business activity can lead to double taxation, adding friction to cross-border business activity and curtailing sustainable economic development. Tax cooperation among jurisdictions seeks to neutralise these unintended negative impacts of competition, while protecting tax bases. 

Tax competition can risk a ‘race to the bottom’ when countries reduce their corporate tax rates to attract corporate activity and investment. Although these reductions can generate a short-term competitive advantage and increased investment, this advantage can be eroded when competitor countries respond. Rate reductions may also erode tax bases, undermine public revenues, and exacerbate inequality by shifting the tax burden onto smaller businesses and individuals. Between 2000 and 2020, for instance, statutory corporate tax rates fell in almost all regions of the world, although they have since stabilised.^[1] The global minimum tax under Pillar Two of the Two-Pillar Solution, now being implemented in over 60 countries worldwide, will help curtail the race to the bottom by raising the floor on tax rate competition from zero to an effective rate of 15 per cent. Similarly, in certain cases, cross-border transactions can also cause information asymmetries which create tax avoidance risks. Agreements on exchange of information can reduce these asymmetries and tax avoidance opportunities.

Cross-border investment and economic activity can also potentially be discouraged by uncoordinated actions between countries which may result in double taxation of corporate or individual income. Recognizing this, nations often enter into bilateral or multilateral agreements to coordinate taxation in a manner that avoids double taxation and protects tax bases from harmful competition such coordination is often embodied in tax treaties based on the OECD or UN Model Tax Conventions. These agreements prevent double taxation, foster cooperation and support economic growth. 

International coordination on tax aims to support forms of tax competition that effectively support growth while preventing harmful practices that damage countries’ tax bases and revenues. To do this requires tackling tax avoidance by multinationals, ensuring that tax policies promote growth rather than creating barriers to investment. The OECD will continue working with countries worldwide to promote international taxation that supports economic stability, governments’ fiscal positions, and growth.

[1] OECD (2024), Corporate Tax Statistics 2024, https://www.oecd.org/en/publications/corporate-tax-statistics-2024_9c27d6e8-en.html

Daniel J Mitchell, Senior Fellow, The Cato Institute, USA

Because politicians tend to prioritise vote buying above everything else, they have an unfortunate tendency to endlessly expand the burden of government, usually accompanied by punitive tax increases and rising levels of debt. These bad policies lead to slower growth, stagnation, and then fiscal crisis. To hopefully guard against this grim downward spiral, there needs to be some sort of external constraint on the short-sighted greed of the political class. Tax competition serves this role. If politicians know that entrepreneurs, investors, and other successful taxpayers can escape (or at least their money can), that will discourage destructive class-warfare tax policies. Jurisdictional competition is especially valuable in a world of demographic decline. Due to increasing lifespans and falling birthrates, many politicians will be tempted to try to prop up poorly designed welfare states by increasing taxes. If they succeed, that will merely accelerate the aforementioned downward spiral. Tax competition hopefully makes that outcome less likely. However, even if politicians blindly pursue bad policies, it will be important to have countries that are a refuge for oppressed taxpayers.

Tove Maria Ryding, Policy and Advocacy Manager for Tax Justice at the European Network on Debt and Development (Eurodad)

Taxation forms the backbone of well-functioning states. It is the most important source of revenue for public services, as well as a vital system for promoting economic equality and regulating behaviour. But domestic tax systems will never be fair and effective unless governments manage to cooperate and provide an international system to prevent abuse, close loopholes, and ensure consistency, clarity, certainty, stability and fairness.

The moment governments started viewing taxation as an intergovernmental game – a ‘competition’ – they didn’t only kickstart a global race to the bottom, which quickly left everybody much closer to the bottom. They also created an international tax environment marked by conflicts, mistrust, constantly shifting policies and instability. The fact that the world’s wealthiest individuals and multinational corporations can use international structures, opacity, and harmful tax practices to dodge taxes has caused inequalities to escalate, and put a heavy pressure on consumers, workers, and small and medium enterprises, which are left with a disproportionately large tax pressure and underfunded public services. The inability of governments to mobilise sufficient resources has also caused debt burdens to escalate, leaving global government commitments on development and environmental protection deeply underfinanced. These factors increase the risk of further instability – both in the short and longer term – and the global economy is not shielded from the impacts.

In the long run, the game of tax competition has no real winners. It is high time for governments to end the days of tax competition and embark on the era of tax cooperation.

Luke Dorman, Researcher/Analyst, and Mark Pragnell, Managing Director, Pragmatix Advisory, UK

"The spirit of commerce sooner or later takes hold of every nation, and it cannot exist side by side with war." – Immanuel Kant

Global competition, including in tax, provides the soundest of foundations for cross-border cooperation and international economic stability. Healthy rivalry between national tax regimes facilitates the expansion of businesses between nations and encourages them to invest beyond their home market. With offices, assets and workforces spread across seas and borders, such companies have much to lose from instability.

Although now too-often seen through the negative lens of supposedly lost French and German government revenues, over recent decades, tax competition provided the growth platform for the modern multinational corporations that have revolutionised our business and personal lives. Apple’s first entry into European markets, for example, was through Ireland in the 1980s catalysed by low corporate taxes.

We might think global cooperation requires international organisations, secretariats, and resolution files as thick as a brick. There is a place for these, but the forces of trade provide a surer basis for peace than any written agreement. At a simple level, exchange between countries means that nations depend on each other, and are therefore less likely to come into conflict. Trade and interdependence breeds stability, and prosperity.

The roots of a more stable economy and peaceful society are found, not in the recesses of the council of the Organisation for Economic Co-operation and Development, but in the struggles of global competition.