The Trouble with Tax Competition: From Practice to Theory

49 Pages Posted: 7 Feb 2017  

Lilian V. Faulhaber

Georgetown University Law Center

Date Written: February 6, 2017

Abstract

In the past few years, policymakers have argued that everything from Apple’s Irish tax deal to patent boxes to the LuxLeaks tax rulings represented so-called “harmful tax competition.” Despite the common use of this term, there is no internationally accepted definition of harmful tax competition.

This Article uses the anti-tax-competition measures proposed and implemented over the last twenty years to reverse-engineer what policymakers believe to constitute harmful tax competition. This Article then distills three important lessons about international tax competition from these measures. First, the different visions of harmful tax competition represented by recent anti-tax-competition measures reveal that, when countries claim to be limiting tax competition, they are not leveling the playing field so much as they are shifting it in their own favor. Second, international tax competition relies on international tax avoidance, and international tax avoidance relies on international tax competition. This in turn means that jurisdictions are complicit in international tax avoidance, while taxpayers (particularly multinational corporations) are complicit in tax competition. Third, these two lessons together suggest that countries are often using both anti-tax-competition measures and anti-avoidance measures not just to limit tax competition by other countries but also to strengthen their own competitive position.

Given these lessons, academics and policymakers should avoid the term “tax competition” and instead focus on the underlying issues that countries are in fact debating. Since it is unlikely that policymakers will abandon the tax competition rhetoric entirely, this Article also argues that future efforts to combat international tax competition could avoid some of the problematic implications of this term if they were focused on taxpayers rather than on jurisdictions.

Keywords: Tax Policy, Tax Competition, International Taxation, Tax Reform, Regulatory Competition

JEL Classification: H20, H21, H25, H26, H30, H41, H73, H87

Suggested Citation

Faulhaber, Lilian V., The Trouble with Tax Competition: From Practice to Theory (February 6, 2017). Available at SSRN: https://ssrn.com/abstract=2912477 or http://dx.doi.org/10.2139/ssrn.2912477

Lilian V. Faulhaber (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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