Is tax competition good?

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In sports, competition is considered good, because it brings out the best in individual and team effort, as well as provides entertainment for viewers. Opinions differ, however, in the tax world.

Professor Mike Devereux, director of the Oxford University Centre for Business Taxation, agrees with many observers in the U.S. who feel that the international system of taxing profit is in desperate need of reform. But, he says, the latest proposals from the U.S. are not the way to do it.

“The proposed cut in the U.S. corporation tax rate to 20 percent (from 35 percent) will almost certainly spark another global reduction in tax rates on profit as other countries respond,” he said.

There are those who would argue that tax reduction is good, Devereux acknowledged. “From a business perspective, anything that reduces tax is good, including competition,” he said. “But from a perfect policy perspective, government needs to raise tax revenue so it can provide goods and services at the level which they believe is appropriate. Take the level of expenditure in the U.S.: Is it reasonable to be funded by a tax on business profits? You can debate that, but all countries do it. And the impact is tax competition makes it more difficult to collect tax.”

Dustin Stamper, director in the Washington National Tax Office of Top 6 Firm Grant Thornton, believes that however competition is viewed, it will be a fixture in the present system. “Competition is happening, regardless of whether the U.S. is involved,” he said. “The U.S. can’t just sit on the sidelines while everyone else lowers their tax rates. It’s absolutely appropriate and good for the economy to modernize business tax rates and make the tax system more internationally competitive. Tax competition will happen regardless of what the U.S. does with its rates.”

Devereux proposes a destination-based cash flow tax that would address the following issues that he sees as problems with the current system of taxation:

  • It facilitates and encourages the shifting of profits to tax havens;
  • It incites competition in corporate tax rates between countries; and it means that decisions about business location are disproportionately influenced by tax considerations.

“In the existing system, where you’re taxed depends on the kind of income you generate. It’s a source-and-residence-based tax. Multinationals can shift their activities all over the world, but the one thing they can’t move is the customer,” he said. “Under a destination-based system, if a U.S. company sells something to me in Oxford, the income generated would be taxed in the U.K. There’s nothing the U.S. company can do to avoid it.”

Ideally, the system would be effective at eliminating competition if everyone did it, Devereux indicated. “The reason for tax competition is that companies are trying to attract investments, and other countries will respond to it. With a destination-based tax, that reason falls away because it makes no difference where production takes place, the tax is on the sale to me, in the U.K. So there’s no value for a country to reduce its tax rate to attract investment because it wouldn’t work.”

Stamper acknowledged the attraction of a destination-based tax, similar to the border adjustment proposal that had been a part of the House Blueprint.

“I’m a fan of border adjustability,” he said. “But regardless of its merits, it’s proven to be a political impossibility.”

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Tax reform Tax rates Corporate taxes International taxes