Twenty years ago I wrote “Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State” (113 Harv. L. Rev. 1573 (2000)), which argued that “[t]he current age of globalization can be distinguished from the previous one (from 1870 to 1914) by the much higher mobility of capital than labor… The mobility of capital is linked to tax competition, in which sovereign countries lower their tax rates on income earned by foreigners within their borders in order to attract both portfolio and direct investment. Tax competition, in turn, threatens to undermine the individual and corporate income taxes, which traditionally have been the main source of revenue … for modern welfare states. The response of developed countries has been first, to shift the tax burden from (mobile) capital to (less mobile) labor, and second, when further increased taxation of labor becomes politically and economically difficult, to cut the social safety net. Thus, globalization and tax competition lead to a fiscal crisis for countries that wish to continue to provide social insurance to their citizens at the same time that demographic factors and the increased income inequality, job insecurity, and income volatility that result from globalization render such social insurance more necessary… This article argues that if both globalization and social insurance are to be maintained, it is necessary to cut the intermediate link by limiting tax competition in a way that is congruent with maintaining the ability of democratic states to determine the desirable size of their government.” This paper reviews the development of tax competition in the subsequent two decades and argues that while it became worse in the period from 1998 to 2008, the financial crisis of 2008 and subsequent developments led to the enactment of promising limits to tax competition in OECD countries that in turn should enable them to strengthen the welfare state.


Law | Law and Economics

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