Tax competition

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Tax competition () is competition between states or within a state between local authorities to strengthen the competitiveness of their own economy through tax policy by designing the tax system or to be attractive as a business location for taxpayers.

General
International tax competition requires cross-border economic activities, i.e. foreign trade (export, import), foreign direct investment, interbank trade, multinational companies, arbitrage or speculation. Taxation is not uniform either within a state or internationally; there is a tax differential. This does not exist by chance, but is also the result of tax competition. Internationally, the terms high-tax country, low-tax country and tax haven have formed. Favorable tax conditions in individual states lead to tax evasion and lower tax revenue in the high-tax countries.

A prerequisite for tax competition is the freedom of establishment for companies and the free movement of persons for individuals to be free to choose their place of business or place of residence, because the place of residence is decisive for taxation in the country of residence.

Species
The OECD distinguishes between “harmful” () and “harmless” () tax competition. It sees the free-riding problem as harmful, among other things, when companies use the infrastructure of one state but relocate their tax base to another country or when tax havens and their users leave the financing of global public goods to the taxpayers of the high-tax countries. Poaching in tax bases, which are due to other states, or carrying out investments, which are mainly carried out for tax reasons in a particular country, without a real location decision being made, is also considered harmful. Finally, the OECD identified three practices adversely affecting high-tax countries, namely countries with generally low income taxation (tax havens), countries with a taxation system that privileges only certain incomes (harmful privileges), and countries with a tax rate applicable to all, below that of a high-tax country, but which is nonetheless essential for tax revenue.

Domestic tax competition arises through the tax sovereignty, which in Germany, for example, lies not only with the Confederation (for federal taxes) but also with the Länder (for state taxes) and municipalities (for municipal taxes). For example, municipalities impose different business taxes by applying different rates. The lower they are, the more likely new businesses are to settle in a commune.

Statistics
Since 2000, average profit tax rates in the EU15 have declined by 28% from their original levels. The decline in profit taxes is a moderate