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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 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
BOOK REVIEW smaller government. But the authors are more optimistic than the critics: They keep their fingers crossed that future installments of tax competition will eventually ‘‘starve the beast.’’ Count me a skeptic. Given demographic aging in all OECD countries and sharp income inequalities among the elderly, it seems doubtful that tax competition will curtail entitlement spending. Indeed, entitlement spending could easily double over the next generation, with medical care accounting for most of the expansion. In the contest between tax cuts and grandmother’s heart surgery, guess who wins. For me, the compelling argument for tax competition is that it serves to align fiscal charges with public benefits — just as that hero of public finance, Charles Tiebout, described a half century ago. Tiebout, of course, was talking about local governments. But in the face of rising tax competition, many national governments have not only reformed their tax systems but also have enhanced the business environment by improving transportation, power grids, telecommunications, schools, hospitals, and museums. Given the virtues of tax competition, Edwards and Mitchell condemn attempts to harmonize national tax systems, led by the OECD and the European Union. In fact, the anti-tax-competition crowd has gradually lost its voice in recent debates. However, it seems wrong to dismiss wholesale the arguments advanced for tax harmonization. One subject where I agree with the tax harmonization school is the need to share information on investments by nonresidents between the host country and the home country. In the Cato view, the creation of efficient reporting networks will suppress tax competition. That’s true, if the term ‘‘tax competition’’ is stretched to encompass means of furthering tax evasion. But my belief is that the country of citizenship or residence of natural persons has the right to tax their worldwide income if it chooses; accordingly, capital income earned abroad should be reported by the host country as a matter of comity between nations. This issue is closely related to an important but often overlooked question: Do the virtues of tax competition apply with equal force to personal income taxation as to corporate income taxation? That’s where Tiebout entered the debate, with the metaphor of disaffected citizens ‘‘voting with their feet.’’ But citizens cannot change nationality as easily as residence; and in some countries, the rights and privileges associated with citizenship are extremely valuable. Against this factual background, I think it’s an open question whether unfettered tax competition is appropriate in the realm of personal taxation. Edwards and Mitchell have written a most entertaining book — not an easy feat when the subject is taxation. Casual readers will enjoy stories about celebrities — Ringo Starr of Beatles fame, Irish rock band U2, Swedish pop group ABBA, and others — who have channeled their wealth and royalties to tax haven jurisdictions. Policy wonks will appreciate the comprehensive surveys of tax reform. There’s something for everyone — even the Obama team and its congressional allies. ◆ 416 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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tax notes international - Tuck School of Business - Dartmouth College

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