19 October 2021

The latest International Tax Competitiveness Index, published by the Tax Foundation, illustrates the wide variation in the quality of tax systems across Europe. Many view tax competition between countries as a ’bad thing’ and have welcomed the global tax plan to raise more revenues from multinational companies. However, attempts to harmonize corporate taxes are unlikely to bring the benefits that are hoped for, not least because any increase in the tax burden on companies will inevitably be passed on to real people.

The benefits of tax competition are also underappreciated. Tax competition has contributed to the reduction of tax rates and broadening of tax bases, which make the tax system more efficient and fairer. Like any other form of competition, tax competition also encourages innovation. Finally, tax competition acts as a check on governments’ ability to raise taxes, helping to correct the tendency of politicians to overspend and overtax.