International Tax Competition

Sound money does not fall from the sky and neither do tax-revenues. A tax, by definition, siphons resources from the private sector, which inevitably hinders the accumulation of productive capital. Common sense offers a very straightforward solution to this problem: get rid of the drag. Unfortunately, this is not an option. Taxes are unavoidable and therefore, a key objective is to design a tax code that minimises its inherent harm to business productivity and economic growth. The Hayekian roadmap offers a very straightforward solution: if we really wish to regain competitiveness, fiscal integration should come about from spontaneous channels of international coordination and competition. The emergence and flourishing of competition among Member States leads to short-run differentials in cross-border tax rates, which in turn generates investment opportunities and mobility incentives of the factors of production. These dynamic processes within the union put a downward tax-setting pressure on every Member State, greasing the wheels for productivity gains to take off (which is, according to international experience, one of the main determinants of GDP growth).