Tax Competition

Globalization has significantly reduced the cost of cross-border economic activity. This cost reduction has been responsible for large increases in worldwide commerce and also a dramatic expansion of international capital flows. These developments have greatly benefited consumers and the overall global economy, but they also have yielded important indirect advantages. Governments, for instance, must now compete to attract jobs and capital (or to keep jobs and capital from fleeing to jurisdictions with better policy), and this scarcity is encouraging politicians to lower tax rates and reform tax systems.

This process, known as tax competition, has led to sweeping changes in tax policy. Personal income tax rates have dropped, corporate tax rates have plummeted, and more than 20 governments have adopted flat tax systems. With a few ...

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