Tax competition

Tax competition is a phenomenon that has been given much attention recently, both in the media and in academic debate. The idea behind this is that in a globalised world capital has become mobile. This means that firms and individuals not only invest in their own country, but also abroad, at very low transaction costs. If governments want to increase investment in their country, they can try to make their country more attractive. The most obvious way to do this is by cutting taxes. If all countries do that however, then everybody will raise less taxes and less money will be available for public services. The total amount of investment however will not change very much. This is the general idea, but we will see in this article that the issues are in fact more complicated, and the results of tax competition rather ambiguous.