You don’t see it too often, but philosophy scholars Danielle Wenner and Kevin Zollman published an op-ed in the New York Times on international tax competition.  The core of the op-ed’s argument is that international tax competition comprises a “coordination problem” that ends up undermining the welfare of national states and governments:

Globally, corporate taxation is ripe for collective action problems. If nations didn’t have to compete with one another, they would all benefit from imposing higher corporate taxes. But they do have to compete, so each individual country has a self-interested reason to lower its corporate tax rate, undercutting other countries to attract investment. Even if all other states agree to coordinate (or “harmonize”) to maintain higher rates of taxation, individual countries will still face an incentive to lower their tax rates to attract greater investment.

I can’t argue with that assessment, though the authors present few concrete policy responses in light of the problem.  Besides extolling “solutions that combined individual changes with the creation of institutions to help parties cooperate with one another”—solutions that could “incorporate[e] tax harmonization schemes into bilateral or multilateral trade agreements”—the op-ed relies, overly in my opinion, on the need for “an administration that was willing to work with — rather than against — other global leaders in tackling collective problems.”

I’m all for an interest in cross-border regulatory dialogue, but experience shows you’ll need more than that.  First international tax competition belies more than just a coordination problem.  Countries will have, by definition, varying tax outlooks and preferences since they face different fiscal conditions and constraints.

Moreover, countries compete on many vectors to attract investment, tax being just one.  So if every nation adopted the same tax policy, competition would shift to something else, and nations that may have been able to attract investment competing would find themselves losers where rules are harmonized. As a result, to deal with international tax competition some kind of distributive mechanism would be needed to pay off otherwise losing countries from adopting low tax policies.  And this in turn would require parties to agree on just how much low taxes benefit their competitive posture vis a vis foreign investment, and one another—which would be extraordinarily difficult, politically and otherwise.  It’s why even under Obama, a truly internationally minded present, the global ‘race the bottom’ in corporate tax was already well in full swing the day he entered office, and continued throughout his term.

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