Introduction
Politicians, policymakers, commentators, and academics worldwide debate harmful tax competition and decry the “race to the bottom” regarding corporate tax rates. These terms-“harmful competition” and “race to the bottom”-refer to efforts by individual countries to change their corporate income tax systems to attract investors, revenue, or other resources away from other countries. These efforts range from providing low corporate tax rates to treating certain taxpayers more favorably than others.
Despite the ubiquity of these terms, however, there is no accepted definition of harmful tax competition. Moreover, not only is the definition a subject of debate but so too is everything else related to tax competition. Is tax competition sometimes helpful rather than harmful? What types of tax competition are “harmful,” and what types are not? Is anything even wrong with tax competition? Although academics and policymakers have tried to answer these questions, results have been limited.
The lack of agreement on harmful tax competition has not prevented countries from trying to stop it. This Article looks to recent developments in the fight against tax competition in order to reverse-engineer the concept of harmful tax competition as understood by governments and international organizations. If governments are designing rules to fight harmful tax competition, a study of what those rules target can tell us what those countries consider to be harmful tax competition. In other words, this Article applies lessons from the practice of limiting so-called harmful tax competition to inform the theory surrounding this concept.
Reverse-engineering a definition of harmful tax competition leads to three important insights. First, countries and international organizations have not settled on one definition of harmful tax competition or one explanation for why or when tax competition becomes harmful because they do not in fact want to eliminate tax competition entirely. Instead, the goal is to constrain tax competition in a way that favors the country or countries (in the case of international organizations) involved. This means that there is no generally accepted baseline of acceptable tax competition against which to define harmful tax competition. The baseline is whatever the party defining tax competition considers will make it most competitive; rules that shift the competition away from this baseline therefore are deemed harmful. This lesson is important not just for individual countries but also for the European Union, whose anti-tax-competition measures may have been designed to make the EU more appealing to investors and voters in the face of anti-EU sentiment and Brexit.
Second, the distinction between tax avoidance and tax competition is much less clear than is generally understood. Tax competition is competition among governments, while tax avoidance consists of efforts by taxpayers to avoid the taxes imposed by governments. However, tax avoidance today relies on tax competition since most international tax avoidance transactions are only valuable to taxpayers if the country on the other side of the transactions provides a low rate or preferential treatment. Countries are complicit in tax avoidance schemes-and taxpayers (often multinational corporations) are complicit in tax competition. Recent efforts to curtail tax avoidance therefore can be described as efforts to limit tax competition.
Finally, and most crucially, since anti-avoidance measures target international tax competition, and measures targeting international tax competition are efforts to shift competition in favor of the country or countries passing the anti-tax-competition measure, both recent anti- tax-competition and anti-avoidance measures are themselves forms of tax competition. In other words, even when countries seem to be trying to limit tax competition, they are in fact competing.
These lessons are of fundamental importance to policy debates about international taxation. Because policymakers frequently use the prevention or limitation of tax competition as a justification for their own policies, highlighting that anti-tax-competition measures are in fact their own form of competition complicates the idea that only some countries are involved in tax competition and underscores the need for more nuanced conversations about what countries intend to achieve with their tax systems.
This Article proceeds in four parts. Part II highlights the lack of agreement on what is or is not tax competition and sets out the general arguments in the academic literature for and against tax competition. Part III discusses efforts to curtail tax competition over the past several decades and uses these efforts to identify what countries understand to constitute “harmful” tax competition. A consensus over the definition of “harmful tax competition” grew out of work done by the Organisation for Economic Co-operation and Development (OECD) and the EU at the end of the 1990’s. This was followed by more recent developments, including the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, the European Commission’s state aid decisions, the EU’s proposals for an anti-avoidance directive and a common corporate tax base, and several unilateral efforts. These more recent developments reveal how beliefs about what is harmful about tax competition have changed over the past two decades.
Part IV draws three lessons from these developments.
Part V proposes a typology of tax competition. Acknowledging that politicians are unlikely to forgo terms like harmful tax competition entirely, the proposed typology provides tools for more nuanced and deliberate discussions of tax competition, which in turn may lead to greater transparency regarding how countries use their tax systems to increase their competitiveness.
This Article identifies what countries target with their anti-tax-competition measures and what politicians really mean when they rail against tax competition. It highlights that using the term “harmful tax competition” masks a much more complex debate, and that this term incorporates normative judgments that vary depending on the speaker. Just as Richard Revesz previously argued in the context of interjurisdictional competition over environmental regulations that we should eliminate the term “race to the bottom” and replace it with discussions that “focus instead on the underlying causes of the socially undesirable results[,] this Article argues that the term harmful tax competition causes more trouble than it is worth, and that debates over international tax policy and competition between jurisdictions should focus on what countries actually intend to accomplish when they use this term.
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