I like tax competition


My thanks to Cato's Dan Mitchell for drawing my attention to this comment by Finland's prime minister:

The overall tax rate will have to rise as well over the longer term. In some areas that can be done without much consultation between the countries. For example, property taxes or inheritance taxes can largely be determined at the national level without adverse economic consequences. But such taxes will not raise significant amounts of revenue. Only changes in value added tax, various excise taxes or taxes on earned and capital income can make a real difference. However, raising such taxes can have detrimental effects on economic activity. This is especially so when a country acts on its own: capital and people can respond by migrating to jurisdictions with lower rates. Deeper co-operation is therefore necessary if tax revenues are to be increased in a way that truly helps fiscal consolidation.

In other words, if we don't prevent tax competition, we won't be able to raise taxes as high as we want to. In order to make big government even bigger, we need to establish a tax cartel so people have no choice but to cough up. As Dan says, this idea is nothing short of an OPEC for politicians.

Still, at least the Finnish prime minister is being honest about his intentions, which is a lot more than you can say for Gordon Brown. He tries to tell people that we need to crack down on tax competition in order to make everyone's savings "much safer". And that, quite frankly, is laughable.

I favour tax competition for the same reason that most politicians oppose it: it puts a limit on how much of our income they can get away with stealing, and forces them to think about the effect that higher taxes are going to have on the economy. It's a blunt instrument, sure, but it's one of the few that taxpayers' have got. If anything, governments should be extending tax competition to different areas within countries, not attempting to curb it through international stitch-ups.