Treasure Islands - Nicholas Shaxson [94]
At first glance, these arguments seem reasonable. But look closer, and they collapse in a puff of nonsense. Here’s why.
Competition between companies in a market is absolutely nothing like competition between jurisdictions on tax. Think about it like this: If a company cannot compete it may fail and be replaced by another that provides better and cheaper goods or services. This “creative destruction” is painful, but it is also a source of capitalism’s dynamism. But what happens when a country cannot “compete?” A failed state? That is a very different prospect. Nobody would, or could, as Mitchell put it, “shut down New Hampshire.” What does it actually mean for a country to be “competitive”? Governments obviously do not “compete” in any meaningful way to police their streets. They do, perhaps, compete to educate their citizens better, but this kind of “competition” points to higher taxes to pay for better education.
The Geneva-based World Economic Forum (WEF) provides a more comprehensive answer, defining competitiveness as “the set of institutions, policies and factors that determine the level of productivity of a country.” It uses 12 competitiveness “pillars,” including infrastructure, institutions, macroeconomic stability, education, and efficiency of goods markets. One could quibble with the categorizations, but taken together they form a sensible enough selection. Most of them require raising appropriate levels of tax.
It turns out, in fact, that the most “competitive” countries on the WEF’s measure are the higher-tax countries. There is plenty of variation, of course: Sweden, Finland, and Denmark, the world’s three highest-taxed countries, were ranked fourth, fifth, and sixth most competitive in the 2009–10 index, while the United States, with lower (but still not very low by world standards) taxes, is second. But the really low-tax economies like Afghanistan and Guatemala are the least competitive.
Dig further into the data, and other interesting facts emerge. Countries that spend a lot on social needs—something Mitchell opposes—score best on the competitiveness scale.”9 Higher taxes help countries spend more on education, health, and other things that help their workers “compete.”
What applies to tax applies to laws and regulation too. What does it mean for a jurisdiction to have a “competitive advantage” in being a heroin smuggling entrepôt or offering lax enforcement on child sex tourism? It may bring in revenue, but in the sense that countries do “compete” with others, it can clearly bring great harm.
Mitchell’s world of beneficial tax competition emerges from a sub-school in economics that clings to a 1956 paper by the economist Charles Tiebout, who explored what happens (only in theory, you understand) when markets are perfect and free citizens flee in hordes from one jurisdiction to another at the drop of a tax inspector’s hat. This is not, of course, how the world works—but libertarians and defenders of tax competition stretched Tiebout’s ideas like rubber to make their intellectual shield for the havens. Mitchell also points to lists of secrecy jurisdictions, claiming they tend to be wealthier than other jurisdictions, and takes this as evidence that offshore is a good thing. This is like an argument that points to the private jets, yachts, and palaces owned by a rich dictator and his cronies as evidence that corruption generates wealth. Well, it does, in a way, but “generating” this kind of wealth is not exactly what we should aim for.
Yet there is one area where Mitchell is probably right. Tax rates have been tumbling for years around the world: Average corporate tax rates, for example, fell from nearly 50