tax notes international - Tuck School of Business - Dartmouth College

The Global Tax Revolution: The Rise of Tax
Competition and the Battle to Defend It
The Global Tax Revolution: The Rise of Tax
Competition and the Battle to Defend It
by Chris Edwards and Daniel J. Mitchell
Published by the Cato Institute: Washington
(2008).
255 pages
Price: $21.95
Reviewed by Gary Clyde Hufbauer, Reginald Jones
senior fellow, Peterson Institute for International
Economics.
Simply because it’s published by Cato, this book
might be dismissed by the tax engineers of the
Obama administrations — people like Chief Economist
Lawrence Summers, Treasury Secretary Timothy
Geithner, House Ways and Means Committee Chair
Charles B. Rangel, D-N.Y., and Senate Finance Committee
Chair Max Baucus, D-Mont. That would be a
mistake.
In response to globalization, many countries have
adopted simpler tax systems with lower rates, seeking
to improve their competitive position in the world
economy. By and large, these efforts have succeeded.
Critics may deplore the outbreak of tax competition,
but Chris Edwards and Daniel Mitchell come to celebrate
the revolution, not reverse it. It’s hard to argue
with success; yet three criticisms are often voiced: Tax
competition undermines the ability of government to
collect revenue; with the result that public goods and
social programs are underfunded; and as collateral
damage, progressivity is eroded because tax cuts favor
capital income and highly paid personnel.
Where others see vice, Edwards and Mitchell find
virtue. Small government is their goal. America’s problem
is not the starvation of public programs, it’s too
much money thrown at social entitlements and bridges
to nowhere. Progressive taxation loads the heaviest burdens
on human and physical capital, and thereby
cripples economic performance.
Surveying reforms around the world, the authors
conclude that tax competition spurs investment and
promotes growth. Not only does tax competition unleash
entrepreneurial energy at home, it also attracts
foreign investment and skilled labor. The authors award
special merit to countries that join the ‘‘flat tax club’’
— in its ideal form (who can forget the famous Hall-
Rabushka postcard return?), a single low-rate tax
across all forms of income. On this prescription, Edwards
and Mitchell would especially like the Obama
administration to take notice. A simple flat tax system
is the path the United States must follow, in their view,
to meet rising competition from the likes of Brazil,
Russia, India, China, and Korea — the BRICKs. As
the first step, the authors recommend sharp cuts in
both individual and corporate tax rates: slashing individual
tax rates to a range between 15 percent and 25
percent, and corporate tax rates to 15 percent.
The rationale behind a ‘‘starve the beast’’ strategy
for reaching smaller and more efficient government is
straightforward: Reduced revenues will restrain public
spending and eventually force government to curtail
excessive promises. On this proposition, I must note
two ironies. First, in recent years, an absence of revenue
has persuaded neither Italy nor the United States
to curb expenditure, despite the ‘‘conservative’’ leadership
of Berlusconi and Bush. Second, as the authors
recognize, tax competition has yet to reduce public revenues
as a share of GDP. Laffer-curve effects — base
broadening and less tax avoidance — are sufficiently
strong that tax revenues typically remain stable or even
rise in the wake of rate cuts.
Recent experience not only contradicts critics who
fear a race to the bottom in terms of public expenditure,
but also disappoints advocates who devoutly urge
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 415
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