Tax competition

Irwin Seltzer makes an important point:

Then there is the competition between nation states for businesses and mobile talents. Nothing offends Brown quite as much as “tax havens”: he plans to attack them at the G20 meeting in London in April. Illegal havens, of course, should be shut down. But legal competition by governments to attract businesses by offering the most attractive mix of low taxes and quality public services is as effective in making government efficient as competition among retailers, or producers of a host of household goods, is in forcing private firms to be efficient.

France’s Nicolas Sarkozy is offended when Brown cuts VAT; he doesn’t like the competition. And Brown is offended when other governments woo British firms by offering to lower the “price” – taxes – charged for residence. He doesn’t like competition that might force him to lower his cost of doing business – the wage bill of the bloated public sector.

Just as we know that competition between companies improves the services that they provide to consumers (and lowers the price at which they provide them) so competition between governments lowers the prices (ie the taxes) and raises the quality of services.

This is why tax harmonisation across the European Union is such a bad idea: because it takes away that competition and thus that incentive for government to become ever more efficient.