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When talking about "trickle-down economics" (or supply-side economics, to use the correct, but lesser known term), one of the main criticism points is that it may work when only a few countries implement it, but that it will generate a "race to the bottom" if most of the countries do.

The logic is quite simple: While one country could get investors back by lowering taxes, this will pressure other countries to lower taxes as well to compensate for the lost invests and get those investors back. After such a lowering round, the situation is a again the same, forcing the original country to once more lower their taxes. This starts a starvation race, until some countries simply can't afford to lower taxes anymore due to uprisings and revolts of the poor classes, as well as aggravating democratic deficits due to the enormous influence of an ever getting richer investor class.

What is the response to this problem from those who support supply-side economics?

Edit (thanks to a hint of Fizz): This is by no means my own made-up position, but a quite widespread criticism of supply side economics, even among economical experts.

The IMF Warns Trump’s Tax Cuts Could Trigger a Global ‘Race to the Bottom’

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  • Wouldn't we also see it in commercial goods though, if that theory were to describe the phenomenon well? Like, why don't companies all just lower their prices forever to capture their competitors' customers? – David Rice Jul 16 '18 at 14:58
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    The things that would be removed on the way to the bottom are regulations and taxes. Removing these shrinks government. Why would it be a problem that needs preventing? As KDog says later here, governments are addicted to power. The issue of preventing them getting too weak will take care of itself. It is exceedingly rare for any government to keep on shrinking itself for more than about one election cycle. – user21424 Jul 16 '18 at 19:37
  • In that they call it "trickle down economics" would imply they don't actually see it as a problem, but a feature. – user1530 Jul 16 '18 at 20:38
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    Since some have questioned your premises, perhaps quote "IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending." nymag.com/daily/intelligencer/2018/02/… I see you've got quite some downvotes, unjustifiedly imo, as the positoin that prompted your question clearly exists outside this site... – Fizz Jul 16 '18 at 22:13
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    As there were some close votes due to "primarily opinion based", I want to note that I don't ask if supply side economics is wrong or right. I ask what arguments are brought up to refute the assumption of a race to the bottom. This is not a question of opinion. – Thern Jul 17 '18 at 8:03
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I don't know if the authors of the paper "Why Is There No Race to the Bottom in Capital Taxation? " actually support supply side economics, but their argument as to why we don't see a race to the bottom in practice comes down to:

Governments thus face a trilemmatic choice when choosing a tax system. They can simultaneously reach only two of the following three policy goals: (i) maintain a solid capital base; (ii) generate sufficiently high-tax revenue; and (iii) avoid social inequity by treating different incomes differently.

In (iii) they refer to taxing mobile capital vs. (e.g.) immobile labor substantially differently.

They argue that (ii) and (iii) are limited by the electorate/democracy, e.g.

voters reduce political support when governments run large deficits, cut spending on relevant issues, and implement policies which voters perceive as unfair.

They claim to have empirical data to support their model (across OECD countries)... I haven't looked into that.

Also, they don't seem to talk about what could happen in countries with a large democratic deficit. Presumably one (or both) of the second or third pillars could be sacrificed... at least temporarily. I guess some non-electoral means of correction would eventually kick in: revolution etc. or at least massive tax evasion by the defavorized groups (e.g. by labor; actually that kinda used to happen in Eastern Europe, though perhaps for different reasons). Oh, and zero CIT (corporate income tax) apparently happened in Moldova in 2008. Apparently Moldova reintroduced it (at 12%) in 2012. There might be an interesting story there...

And since Tim reminded me of the Apple in Ireland case.... it's probably worth mentioning the fairly awkward steps on tax coordination/harmonization at EU level (which is another [potential] counter-mechanism):

[Some terminology first:] Tax coordination refers to a cooperative tax setting, where countries or a group of them build on domestic tax systems to render them compatible with the aims of the Union as formulated in the TEU. Consequently, countries deliberately give up parts of their autonomy in tax matters. Harmonization is viewed as tighter coordination, leading to almost identical or at least similar tax systems, tax bases and tax rates within a Union. [...]

A race to the bottom due to increased tax competition was feared since the very beginning of European integration. It was one of the driving forces behind any attempts to harmonize taxes at the European level. However, tax harmonization succeeded only moderately so far. The main reason was that Member States did not agree on the necessity and also the scope of harmonization, apart from the fact that tax matters remain one of the few areas where a proposal needs unanimity to pass the Council of the EU.

In particular, Ireland and Hungary currently oppose corporate tax harmonisation. (There's a higher level of VAT harmonisation in EU though, with a minimun rate agreed.)

Again, I don't know what proponents of supply side economics (in general) think of tax harmonisation... but if we admit Macron is one of them, then I should mentiond that he is [at least] in favor of a Fraco-German corporate tax harmoniation, perhaps becuase a EU-wide corporation tax harmonisation doesn't look polliticaly feasible at the moment.

And the smaller fish can sometimes be goaded into compying at least paritially, as in the case of EU-Switzerland relations:

Switzerland has come under intense pressure from the European Union (EU) and the Organisation for Economic Cooperation and Development (OECD) to change “harmful” tax practices in the existing tax regime. Most notably, cantons currently charge some foreign multinationals lower rates for profits derived outside of Switzerland.

Following a consultation period, the Swiss government released the final version of its latest reform proposal on Wednesday. It attempts to steer a path between meeting international tax standards and retaining the 4,000 foreign firms that enjoy breaks under the existing regime.

‘Tax proposal 17’ calls for at least 30% of company profits to be fully taxed by cantons before so-called patent box and other research and development reliefs can be applied. Foreign companies that currently enjoy tax breaks would end with a larger bill while smaller firms would pay less, according to a government statement. [...]

The Swiss Business Federation (economiesuisse) said it was crucial that the “most important tax reform in decades” is passed at the second attempt. The cost to Switzerland of a second rejection would be “simply too high”, the lobby group stated. [...] In the worst-case scenario of failing to reform corporate taxes, Switzerland could face sanctions from the EU and OECD.

Last year, voters threw out the initial tax reform plans that were deemed too complex and favoured corporates at the expense of ordinary tax payers. To help convince voters in a potential new referendum, the government has pledged to increase child allowances by CHF30 per child if the package is adopted.

The last paragraph sounds like point (iii) [from the fist paper I mentioned] in action (although it does sound like a fairly lame "bribe").

And since OECD data [again in the first paper discussed] may be too restrictive, there's an IMF paper on wider set of countries:

This paper assembles a new dataset on corporate income tax regimes in 50 emerging and developing economies over 1996-2007 and analyzes their impact on corporate tax revenues and domestic and foreign investment. It computes effective tax rates to take account of complicated special regimes, such as partial tax holidays, temporarily reduced rates and increased investment allowances. There is evidence of a partial race to the bottom: countries have been under pressure to lower tax rates in order to lure and boost investment. In the case of standard tax systems (i.e. tax rules applying under normal circumstances), the effective tax rate reductions have not been larger than those witnessed in advanced economies, and revenues have held up well over the sample period. However, a race to the bottom is evident among special regimes, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero. Regression analysis reveals higher tax rates adversely affect domestic investment and FDI, but do raise revenues in the short-run.

I guess this (race to the bottom under special regimes but not under normal ones) is one the reasons why the EU apparently hates special regimes.

And regarding the US, at least at inter-state level, there's one paper by two Chicago economists (your guess if they are supply side advocates) concluding that:

Our results suggest that the secular decline in capital tax rates, at least among U.S. states, reflects synchronous responses among states to common shocks rather than competitive responses to foreign state tax policy. While striking given prior empirical findings, these results are fully consistent with the implications of the theoretical model developed in this paper and presented elsewhere in the literature. Rather than “racing to the bottom,” our findings suggest that states are “riding on a seesaw.” Consequently, tax competition may lead to an increase in the provision of local public goods, and policies aimed at restricting tax competition to stem the tide of declining capital taxation are likely to be ineffective.

And OECD has a paper that has among its conclusion has a list of (non-central) taxes sorted by the order in which they experience downward tax pressure:

The intensity of tax competition depends on the tax category households and firms are subject to. Sub-central business taxes, i.e. taxes on capital and capital income, are most prone to tax base mobility and hence tax competition, followed by sub-central personal income taxes. Taxes on residential property are the least affected by tax competition. Competition on consumption taxes depends strongly on the size of jurisdictions.

The same paper also lists some mitigating factors, mainly size and diversification of the local economy:

Several other factors affect tax competition and tax base mobility: Large jurisdictions with agglomeration economies are less affected by tax base mobility and tend to set higher tax rates. Capitalisation, i.e. the impact of taxation on property prices, reduces tax base mobility and tax competition. Spending on public services, especially infrastructure and education may compensate for higher tax rates and reduce competitive pressure. Fiscal equalisation reduces tax base mobility and tax competition.

Although this paper is about sub-central taxes, I think it's safe to infer from it some global conclusions: for instance the corporate income tax experiences the highest pressure (among the nation-level taxes), but we don't see widespread zero corporate taxes among large countries. Instead only some small "fiscal paradises" have zero corporate tax.

And a 3rd worthwhile point from the OECD paper (I'm giving you the expanded version found later in the paper)

SCG [sub-central government] tax rates tend to go up rather than down, and they tend to converge over time, regardless of the tax type (Figure 5). A “race to the bottom”, especially between wealthier SCGs, cannot be observed. This tends to contradict the view that tax competition may result in taxation levels too low to sustain adequate public service levels. Moreover, the trend for rising tax rate differences between SCGs cannot be confirmed: for the countries under scrutiny, tax rates mostly tend to converge rather than to diverge. While the results do not cover all OECD countries with highly autonomous SCGs, they nevertheless provide a fairly broad sample of SCG tax setting behaviour.

Different factors may explain why the “race-to-the bottom” hypothesis is not confirmed. First, in many countries where SCGs tap the same base as central government, vertical tax competition – which has the effect of increasing rather than decreasing tax rates – may countervail horizontal tax competition forces, as is best shown by the example of France [...] but is also evident in more decentralised countries such as the United States or Switzerland. Second, in some countries SCGs are not allowed to lower tax rates below a certain threshold, so are actually prevented from further competing on tax policy once the bottom has been reached [...]. Third, many fiscal arrangements, particularly fiscal equalisation can actually reverse incentives and make SCGs increase rather than decrease their own tax rates, with a trend towards more equal taxation across SCGs [...].

enter image description here

I'm rather underwhelmed by this last graph because all data is from before the financial crisis (this might be on purpose though) and using the sales tax in the US is perhaps less representative than what Tim mentioned as the main problem there (local tax breaks on investments)... the fact that that tax would experience higher pressure is actually acknowledged by the previous conclusions of the OECD paper. I suspect there might not be enough quality data for a comparison though, given the difficulty with accounting for all the special local tax deals.

Let me not forget their (OECD) points about vertical tax competition (which has an opposite effect, of increasing taxes):

Vertical tax competition occurs when different government levels have individual discretion in setting rates on a common tax base. When an individual government or government level changes its tax rate, it affects the tax base for other government levels. For example, an increase in a central government capital tax reduces national savings, thereby reducing the capital stock in all sub-central jurisdictions. Similarly, an increase in the central government personal income tax reduces incentives to work and hence the income tax base for all SCGs. Since the tax increase imposed by one government level diminishes tax revenues for the other government levels, these in turn may have to increase their own taxes in order to rebalance budgets. The tax base becomes a common good, where each government level is imposing a tax externality on the others. Vertical tax competition can be quite pervasive in countries with concurrent taxation of corporate income, personal income or sales and turnover taxes. Examples are a central government income tax on which SCGs set individual surcharges or a combined central/sub-central VAT/sales tax.

Vertical and horizontal tax competition interact. Vertical tax competition tends to raise tax rates and hence to partially offset the effects of horizontal tax competition, but the overall effect depends on the tax mix and the elasticity of the shared tax base. Over-taxation might become an issue if an inelastic tax base – such as the property tax or some consumption taxes like the gasoline tax – is shared across government levels, while it could be less salient when a more mobile base – such as when the corporate or personal income tax – is shared. Vertical tax competition also depends on the extent to which the central government can commit as a “first mover” to a tax policy that SCGs then take as given. In other words, the more “hierarchical” the relationship between the central and the sub-central level, the less significant is vertical tax competition. Finally, government’s objective functions in terms of taxation as well as political economy constraints – such as voter’s behaviour – limit the extent to which government levels can exploit the joint tax base. Tax policy coordination across government levels may further help reduce vertical tax competition and excessive taxation.


As a coda, since most of the above is fairly "mainstream", I tried (at K Dog's suggestion) to find some Austrian (economics) school views on this issue. Mises Institute has an article titled "race to the bottom", but that article talks only of election promises. Separately Mises Institute has another article finding nothing wrong with tax competition:

For a supporter of Misesian theory, any mechanism that puts pressure on governments to lower taxes has to be good news. Often the only incentives for government activities and spending seem to be upward ones, as lobby groups and politicians seek to extend the power of the State. Hence the historical trend for taxes to increase, and anything that helps counter this will be beneficial.

Tax competition does not prevent citizens, through electing their governments, from setting whatever tax systems they prefer. However it does mean that countries will face the consequences of their choices, and it gives an exit mechanism for minorities to protect themselves from victimization. It also helps to counter the democratic deficit caused by the political class offering a very limited choice of policies that does not reflect the range of the electorate. Unfortunately this makes tax competition as popular amongst governments as other forms of competition are amongst large corporations, and so often their reaction is to form a cartel to guard their patch from upstart smaller competitors.

So basically, they deny that tax competition creates any problems that the market can't fix by itself, so no worries. They go on to lambast any tax harmonisation as a "cartel", using EU as an example.


Apparently I managed to find a self-described supply sider, namely Dan Mitchell, who also [co]wrote a 2008 book titled Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It. And in this book (p. 8) we read:

The [...] claim is that tax competition creates distortions in the public sector. Any reduction in government revenue that results from capital and labor’s emigrating to lower-tax nations is supposed to be an inefficient ‘‘fiscal externality.’’ Government revenues will fall below the supposed optimal amount as a ‘‘race to the bottom’’ in tax levels ensues.

In Chapter 7, we discuss the theoretical flaws in these arguments. For one thing, they are premised on the ‘‘public interest theory of government,’’ the idea that government officials always act for the general welfare of citizens. We argue that it is naive to assume that if policymakers had monopoly fiscal power without tax competition, they would set tax rates at the optimal level for the good of the people.

At a practical level, there has not been a race to the bottom in tax revenues around the world, as the critics fear. We wish that there had been, but tax competition has not yet ‘‘starved the beast’’ of bloated government. However, in most advanced economies, tax revenues as a share of gross domestic product have leveled out in recent years, and even declined in some places. We also think that governments would have grown larger without the rise in tax competition.

In chapter 7 they mostly talk about how OECD's attempt to define unfair tax competition is hopelessly flawed by complexity. The also argue that--by analogy with free trade--tax competition is good for global growth. And they have one point that includes migration:

A final note regarding labor flows is needed. It might appear that the tax-induced migration of skilled workers, or brain drain, is indeed a zero-sum global game. But when skilled people move to countries with lower taxes, they will likely increase their work effort and put their brainpower to better use. It is true that brain drain has a substantial effect on poor nations, but even here experts note that emigration has benefits. Emigrants send large financial remittances to their home countries, which is an efficient form of aid. Also, emigrants often return home with new skills that they can use to help their countries. Finally, the emigration of skilled workers provides a strong signal to governments that they need to reform their domestic policies.

So the arguments in this book seem mainly that tax competition is mostly good (theoretically) and that the (theoretically) bad aspects of it have yet to materialize... This position seems to be somewhere in-between the Mises-style theoretical view and the mainly empirical results discussed in the largest part of my post.

Unlike Mises-style arguments, this book doesn't argue that low taxes are always desirable. You may wonder how is it that supply-side economics; well it depends how you define that term. This is how Mitchell defined it (not in the book, but in that email exchange published in The Atlantic:

I also would augment your characterization of strong, semi-strong, and weak versions of supply-side economics by adding the "somewhat-strong" version, which is that changes in marginal tax rates affect incentives and lead to changes in taxable income that can have a measurable impact on economic performance. I think it is fair to say that this is what most "supply siders" actually believe (which, to be sure, is different than what some overly-optimistic Republican politicians assert).

And this is what they say in the book about tax policy diversification:

Countries with different industrial structures may favor different tax policies. A country that has a large tourism sector, for example, may want to have low taxes on incomes, but higher taxes on hotel rooms so that foreigners pay some of the costs of government services. Another example of tax diversity was suggested by economists Richard Baldwin and Paul Krugman. They argue that tax harmonization would be inefficient in Europe because ‘‘core’’ and ‘‘periphery’’ countries on the continent should have different tax structures. The University of Chicago’s Julie Roin suggests another situation where tax diversity makes sense. Residents of wealthy cities may not want any new factories because of the resulting pollution, and they will not favor tax cuts to attract investment. However, people who live in cities with high unemployment would be happy to provide tax cuts to lure new investment. However, it might be that tax competition leads to tax systems that are more similar over time, an evolution that can be called ‘‘competitive harmonization.’’ That appears to be what is happening across major industrial countries regarding corporate tax rates. Rates have been cut in recent decades, but they are also in a narrower range than they used to be. Thus, the concerns of harmonization advocates have been partly met, but the harmonization is occurring at a lower rate level than advocates would probably prefer.

So yeah, self described supply-side economists citing a Krugman paper. Heresy!

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  • What about competition between states and cities in the US to give out the most tax breaks? Eg this. This seems to be quite common, and I have read that it often ruins public infrastructure. My guess is that the limiting effect of democracy can be reduced by voter suppression, focus on non-economic issue, and convincing people that this is actually good in the long run (trickle down effect, etc). – tim Jul 16 '18 at 11:02
  • @tim: well, the question was what are (some) arguments that it doesn't happen. I'm not saying those arguments are necessarily correct. Presumably the local electorate will eventually correct the situation... presumably according the theory I found/summarized. Also, the issue of special tax breaks to large investors is a bit different... Ireland does it too (e.g. negotiated with Apple) than across the board reduction. I guess the special breaks go into category (iii) of the above theory: they piss off the rest of the tax base. – Fizz Jul 16 '18 at 11:04
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    The reason that you don't see a race to the bottom in practice is that politicians gain power through taxation and are addicted to it. Note this response doesn't try to answer the question of what a supply sider would argue. It's non-responsive to it. – user9790 Jul 16 '18 at 14:07
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    @KDog It sounds like you want to write an answer from the perspective of a supply sider? I would appreciate that. – Thern Jul 16 '18 at 14:34
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    @KDog: Re: "Note this response doesn't try to answer the question of what a supply sider would argue" The problem with trying to find only arguments of "supply siders" is that it's not clear who exactly is a "supply sider". Take Macron for instance; he denies he is one (at least with respect to "trickle down"), but his critics disagree, e.g. ab-2000.com/en/archives/2017/10/16/… – Fizz Jul 16 '18 at 21:55
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Global taxation

The United States responds to this with global taxation. With global taxation, it doesn't matter where your money is invested, you pay in your country of citizenship. So the US isn't particularly worried about this.

Expatriates

In theory, people could avoid this by changing their citizenship. In practice though, few people did this. If most of your friends and relatives are located in the US, you don't want to give up your US citizenship and lose unfettered travel privileges. Yes, it's possible to get a regular travel visa as a citizen of your new country, but that is entirely reliant on US forbearance. As a citizen, you can always travel to your home country.

The US also charges an expatriation tax. This kind of "exit tax" requires that people who want to expatriate (renounce their citizenship) have to pay tax on most of their unrealized capital gains. So they do not get the (possibly lower) rate of their new country.

The US charges a succession tax on bequests to US citizens from expatriates even after they renounce citizenship. In fact, the rate becomes higher. Instead of a graduated rate that reaches 40%, it is a flat 40% on everything exceeding a certain amount (currently the same as the gift tax exclusion). For many expatriates the effect of this is that they would be better off (from a tax perspective) staying in the US. Even if the capital taxes are higher, the cheaper gift and inheritance tax rates (and the estate exclusion) mean that it may be better to retain citizenship.

The US limits access to Medicare to people living in the United States. So if you expatriate, you will only be able to access Medicare when in the US.

If you spend enough time in the US to become a resident alien, you owe US taxes anyway.

Supply-side theory

Supply-side economic theory is heavily involved with the Laffer curve. The basic idea behind the Laffer curve is

  • Revenue at a 0% tax rate is zero, as no tax is collected regardless of the size of the tax base.
  • Revenue at a 100% tax is also zero, as the tax base will become zero. No one will engage in the taxed activity if there is no financial benefit.
  • Somewhere between 0% and 100% is a rate that maximizes revenue from the tax. If the tax rate is higher than that rate, lowering the tax rate will increase revenue because the increase in the tax base will have a greater effect than the lowered rate.

The basic idea is the same as monopoly pricing. When pricing a monopoly product, you don't charge an unlimited amount. The reason is that for some price, people will choose not to buy rather than pay that price. The profit from someone not buying is zero (or even negative in some cases). So the ideal price is one where the marginal revenue and cost are equal. Above that, the monopoly would make more money by lowering the price.

With a tax, the marginal cost is zero. So we can simplify the calculation. We're looking for the point where the loss in revenue from a smaller base exactly equals the increase in revenue from a higher rate. There have been a variety of calculations of this point ranging from 33% to 70%.

A corollary to this is that society might benefit from an even lower rate than that. That is the rate that maximizes revenue. But that is only the ideal rate for society if the benefit of the additional spending outweighs the benefit of keeping the money.

This also has a basis in monopoly theory. The thing that we don't like about a monopoly is that from society's perspective, it prices too high. Society would be better off if the price was set where marginal and average revenue were equal. That would produce more of the good at a lower price. How do we push the price down to that? We turn the good from a monopoly to a competitive good.

From the supply-side perspective, this race to the bottom is good. Instead of setting the tax rate at the monopoly rate that maximizes government revenue, it sets the tax rate at the competitive rate that maximizes societal benefit. This rate will be higher than zero unless the benefit from spending is zero. Presumably this is not true, so a government that efficiently allocates the smallest amount of spending will be able to better compete for citizens than one with lower spending.

This limits the minimum tax. Instead of being zero, the minimum tax has to be high enough to provide basic spending on things like roads, police protection, etc. The typical billionaire does not want to go live in the jungle, even if the tax rate were zero.

Corporate tax

There is an argument that taxes on corporations and capital in general should be zero. The basic idea for corporate taxes is that all that money will be taxed anyway when it is transferred to employees or owners. For capital taxes, the idea is that the money has already been taxed as income (how else did they get it). So it shouldn't be taxed again. The same argument applies to succession, gift, and inheritance taxes.

I don't want to get into the morals of that position, as it does not match mine (I favor a tax on consumption rather than income, almost the reverse of this position). But it is a position that some people have. Such people would argue that a race to the bottom would be a good thing, even if the tax rate on those activities went to zero.

Another argument is that a lower corporate tax rate would result in more activity, which would increase the personal income tax paid by the employees more than the loss in corporate tax revenue. I.e. a relatively straightforward supply-side view.

A specific example related to the corporate tax. Here's the Larry Kudlow article that it references. Both refer to Laurence J. Kotlikoff's work to power their argument. Unsurprisingly, the Tax Foundation also has its own analysis to cite.

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  • This is almost a perfect answer on theory. One could note the significant rise in tax revenues by Trump's tax cuts in just 6 months as real world validation of the approach. – user9790 Jul 16 '18 at 18:22
  • I've downvoted because your answer (1) is very long mostly but its coverage of the actual race to the bottom issue is sparse (low useful information density), (2) likewise the sources you link to mostly don't talk about the race to the bottom at all, at least explicitly, in particular Kudlow (3) presupposes quite a few odd things like the United States being an entity which thinks for itself etc. – Fizz Jul 16 '18 at 19:44
  • @Fizz you missed the point. A supply sider would contest that the race to the bottom doesn't exist, unless that bottom is more tax revenue in almost all instances – user9790 Jul 16 '18 at 20:42
  • @KDog I don't think anyone can say with confidence at this point that Trump's tax cuts increased revenue. Given the economic recovery that has been happening for a few years prior to the tax cut, revenues were just as likely to increase with or without the cuts. Perhaps with time, we may see benefits. Then again, we may not (it took many years for us to determine that the Reagan tax cuts weren't such a great idea in hindsight) – user1530 Jul 16 '18 at 21:17
  • If I may suggest, your post could be made a lot easier to grasp if you added a summary, which if I'm not mistaken, boils down to: (1) supply-siders want zero corporate tax any way; (2) they are not worried about the personal income taxes being subject to a race to the bottom because people still want to live in nice places. You seem to talk only about citizenship with respect to the latter, but I guess that to some extent the argument applies to local taxes as well. – Fizz Jul 16 '18 at 21:34
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There are three factors of production:

  • Labor.
  • Capital.
  • Land.

Labor is provided by people, and people ultimately use their wages to make more people. So there are plenty of people.

Capital properly refers to productive assets like machinery, company buildings etc. Money is not capital. Capital is just another market, and will respond to demand like any other product.

Land is in finite supply. Because land is limited while labor and capital are not, it is the landowners that make the real money. Indeed, the rent in New York is famously "too damn high" for this reason, and the rent is also too damn high in other prosperous cities.


Fortunately, countries also control the land. They are therefore in the same position regarding tax collection, as landowners regarding rent. If business investors can really force taxes to the bottom, they should also be able to force rent to the bottom.

Since there is no sign of rent being raced to the bottom, it is reasonable to conclude that business taxes should not race to the bottom either. If business taxes do race to the bottom while rent does not, the government is corrupt and/or incompetent.


Of course, this does not apply to wealthy individuals, who can indeed take up residence in some tax haven and pay almost no tax. But the question refers to business investors, and businesses should not be able to get away with it if governments are rational.

In practice governments are corrupt and incompetent to varying degrees, so they do cut business taxes and offer tax breaks even though they don't need to. The 'race to the bottom' argument is really just a rationalization in this case.


As for supply side economics, the theory presupposes that tax rates are far higher than they should be and implicitly assumes that if a race to the bottom exists, it is a race of very slow horses.

Also, cutting top rate income tax is good for wealthy citizens, but foreign investors do not pay this tax so they get no benefit. Increased foreign investment will therefore only occur once the economic miracle has already started. Wealthy citizens are expected to start the economic miracle. So the idea isn't really dependent on foreign investment at all.

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  • How does this answer the question? I don't see any relation to the "race to the bottom", nor to the views of supply side economists. – Thern Jul 16 '18 at 15:50
  • @Thern I read this as pointing out that property taxes are assessed based on the location of the property rather than the location of the citizen. So people can't avoid property taxes by changing citizenship or the owner of record. And it doesn't matter how low the taxes are. No one puts a luxury hotel in an undeveloped jungle. Quite a few people will stay in a luxury hotel in expensive, high tax Manhattan. It's responsive to the question; it just doesn't take the time to link things together. – Brythan Jul 16 '18 at 17:04
  • @Brythan The original version was much shorter and included no reference to the race to the bottom. – Thern Jul 17 '18 at 7:33
  • @Thern Brythan actually posted that before I expanded it. – James Hollis Jul 17 '18 at 15:48
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I'll answer that on multiple levels.

First of all, when a country lowers its taxes, it sees more investment. But only some of that comes from money that would otherwise have been invested abroad. Some of it also comes from money that otherwise would not have been invested at all. So only part of the change is a "race".

Secondly, while we can all agree that there is a level of money that every Government needs to have, supporters of supply-side economics are frequently also believers in smaller government. They may think that lower government revenues are not a bad thing, at least up to a point.

Thirdly, and this more or less goes along with the second one, supporters of supply-side economics may believe that more money in private hands is a good thing in and of itself. The people with such money may invest it (thereby building up the economy further), may spend it doing something important, or may give it away (think Bill Gates or Warren Buffett). That said, some may spend it in useless ways. But which is more common?

One argument I've heard more than once is a question -- do you think you spend money more sensibly, or does the Government?

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  • But which is more common? = in that it's been shown "trickle down economics" doesn't actually trickle down, I'd say it's most common for the wealthy to hoard their wealth. – user1530 Jul 17 '18 at 4:31
  • "do you think you spend money more sensibly, or does the Government?" Well, given the fact that the private debts in the US amount to 13 trillion Dollar, and the debt of the government amounts to more than 20 trillion Dollar, I am tempted to say that neither one does. – Thern Jul 17 '18 at 8:33

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