 | 
TAX COMPETITION
As a Means To
Control Leviathan
by Daniel J. Mitchell
An inquisition into every man's private circumstances, and an inquisition which, in order to accommodate
the tax to them, watched over all the fluctuations of his fortunes, would be a source of such continual
and endless vexation as no people could support.... The proprietor of stock is properly a citizen of
the world, and is not necessarily attached to any particular country. He would be apt to abandon the
country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome
tax, and would remove his stock to some other country where he could either carry on his business, or
enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry
which it had maintained in the country which he left. Stock cultivates land; stock employs labour. A
tax which tended to drive away stock from any particular country would so far tend to dry up every
source of revenue both to the sovereign and to the society. Not only the profits of stock, but the
rent of land and the wages of labour would necessarily be more or less diminished by its removal.
Adam Smith, An Inquiry into the Nature & Causes of the Wealth
of Nations, 1776.
Tax competition exists when people can reduce tax burdens by shifting
capital and/or labor from high-tax jurisdictions to low-tax jurisdictions. This migration disciplines
profligate governments and rewards nations that lower tax rates and engage in pro-growth tax reform.
Like other forms of competition, fiscal rivalry generates positive
results. People get to keep more of the money they earn, and economic performance is enhanced because
of lower tax rates on work, saving, and investment. The capital mobility that defines tax competition
also protects against government abuses. People can guard against corruption and protect their human
rights more effectively when they know that they and/or their capital can flee across national borders.
The thought of losing sources of tax revenue scares government
officials from high-tax nations, who vociferously condemn tax competition and would like to see it
reduced or eliminated. Working through international bureaucracies like the European Union (EU), the United Nations (UN), and the Organisation for Economic Co-
operation and Development (OECD), high-tax governments are promoting various tax harmonization schemes
to inhibit the flow of jobs and capital from high-tax jurisdictions to low-tax jurisdictions.
These proposals are fundamentally inconsistent with good tax policy.
Tax harmonization means higher tax rates, but it also means discriminatory and destructive double
taxation of income that is saved and invested. It also means extraterritorial taxation since most tax
harmonization schemes are designed to help governments tax economic activity outside their borders.
Tax competition should be celebrated, not persecuted. It is a powerful
force for economic liberalization that has helped promote good tax policy in countries around the
world. Even OECD economists have admitted that "the ability to choose the location of economic activity
offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax
excessively."1 Fiscal rivalry among governments has produced an amazingly desirable impact
on fiscal policy in the past 25 years. For instance:
- Nations across the globe felt compelled to lower personal income tax rates following the
Thatcher and Reagan tax rate reductions.
- Tax competition has helped drive down corporate tax rates in Western Europe's welfare
states.
- Numerous nations in the former Soviet bloc have enacted flat taxes, a process greatly
aided by tax competition.
Protecting and preserving the right to engage in tax
competition should be a key goal for economic policymakers, particularly those interested in
promoting economic development in poorer nations. If international bureaucracies succeed in
destroying or limiting tax competition, governments will have much less incentive to behave
responsibly. The absence of competition would undermine countries' opportunities for creative
economic reform and reduce individual freedom.
People throughout the world should be allowed to benefit from lower tax rates. The OECD,
EU, and UN should not limit the options of investors and workers by creating a cartel that
benefits high-tax nations. An "OPEC for politicians" would insulate government officials
from market discipline, and the resulting deterioration in economic policy would slow global
economic performance.
What Is Tax Competition?
When a town has only one gas station, consumers
have very little leverage. In the absence of competition, the gas station is much more likely to
charge high prices, maintain inconvenient hours, and provide inferior service. But when there
are several gas stations, their owners must pay attention to the needs of consumers in order to
stay in business. This means market prices, better hours, and improved service.
More important, competition enhances economic
performance. Businesses of all kinds – if they face competitive pressure – are
constantly driven to improve quality and offer new products in order to attract and hold the
interest of consumers. Competitive pressure encourages better allocation of resources and
boosts economic efficiency. This is why market-based economies tend to grow faster and
provide higher living standards.
Competition between governments has similarly
desirable economic effects. Nations with less inhibiting policies will enjoy more job creation
and investment, much as gas stations with better service and prices will attract more motorists.
But jurisdictional competition is not just about tax policy. Regulatory policy, monetary policy,
trade policy, and legal policy can also erect roadblocks that affect the flow of jobs and capital
across national borders.
Tax competition is just one slice of this competition
among countries, but it is increasingly important because of the growing mobility of capital
and labor. Workers and people with money to invest want to obtain the best after-tax reward
(or rate of return), and their search for profitable opportunities is not limited by national
borders. Not surprisingly, investors and workers tend to leave (or avoid) nations with punitive
tax burdens and onerous tax codes. Instead, these resources gravitate toward nations that
reward private-sector wealth creation—much as motorists gravitate to gas stations that provide
good value for the money.
No wonder politicians from high-tax nations dislike
tax competition. Fiscal rivalry restricts their ability to overtax (and therefore overspend). Just
as the owner of a town’s only gas station is unhappy when competitors set up shop, politicians
do not like competitive neighbors who force them to behave responsibly in order to attract
economic activity – or to keep economic activity from fleeing to a lower-tax
environment.
The tax competition battle revolves largely around the
tax treatment of capital. Investment funds can cross national borders at the click of a mouse,
and this mobility makes it very difficult to maintain high tax rates or to impose discriminatory
taxes on income that is saved and invested. This also helps explain why high-tax governments
are so eager to get the ability to track – and tax – fleeing capital.
Where borders are relatively open for immigration,
the taxation of workers and entrepreneurial talent is beginning to attract more attention from
greedy governments. Many French move to the lower-tax United Kingdom. People from
Canada move to the United States, as do many talented professionals from Third World
nations. And similar tax-motivated migrations take place in other parts of the world. The
phenomenon of workers “voting with their feet” has caused considerable angst among high-tax
nations and has even led to proposals that would give governments permanent taxing authority
over their citizens no matter where they live.
What Is Tax Harmonization?
Tax harmonization exists when taxpayers face similar
or identical tax rates no matter where they work, save, shop, or invest. Harmonized tax rates
eliminate fiscal competition, much as a price-fixing agreement among gas stations destroys
competition for gasoline.
Tax harmonization can be achieved two different
ways:
- Explicit tax harmonization occurs when nations agree to set minimum tax rates or decide
to tax at the same rate. The European Union, for instance, requires that member nations impose
a value-added tax (VAT) of at least 15 percent.2 The EU also has harmonized
tax rates for fuel, alcohol, and tobacco, and there are ongoing efforts to harmonize the taxation
of personal and corporate income tax rates.
Under this direct form of tax harmonization,
taxpayers are unable to benefit from better tax policy in other nations, and governments are
insulated from market discipline.
- Implicit harmonization occurs when governments tax the income their citizens earn in
other jurisdictions. This policy of "worldwide taxation" requires governments to collect
financial information on nonresident investors and to share that information with tax collectors
from foreign governments. This "information exchange" system tends to be a one-way street
since jobs and capital generally flow from high-tax nations to low-tax nations.
Under this indirect form of tax harmonization, just as
under the direct form outlined above, taxpayers are unable to benefit from better tax policy in
other nations, and governments are insulated from market discipline.3
Both forms of tax harmonization have similarly
counterproductive economic consequences. In each case, tax competition is emasculated,
encouraging higher tax rates. This hinders the efficient allocation of capital and labor, slowing
overall economic performance.
Currently, international bureaucracies are pursuing
three major tax harmonization initiatives:
1. The Paris-based Organisation for Economic Co-operation and Development launched a
"harmful tax competition" initiative in the 1990s, identifying more than 40 so-called tax
havens.4 The OECD is threatening these jurisdictions with financial
protectionism if they do not agree to weaken their tax and privacy laws so that high-tax nations
could more easily track – and tax – flight capital. Ironically, the OECD did not
blacklist any of its member nations even though at least four of them – Switzerland,
Luxembourg, the United States, and the United Kingdom – qualify as tax havens
according to the OECD's own definition.
2. The European Union is a major advocate of tax harmonization, and the Brussels-based
bureaucracy has had some success. Value-added taxes, energy taxes, and excise taxes all have
been subject to some level of direct harmonization among EU nations. The EU's current
initiative is the "savings tax directive," an indirect form of tax harmonization that would
require member nations – as well as six non-EU nations – either to impose a
special tax on nonresident investors (and give the lion's share of the revenue to the investor's
government) or to collect information about the investment earnings of nonresidents and
forward it to their respective governments (which would then tax the income).5
3. The United Nations has a "Financing for Development" proposal that calls for the
creation of an International Tax Organization. This new bureaucracy supposedly would have
the power to override the tax policy of sovereign nations and would be specifically responsible
for curtailing tax competition. Equally worrisome, the UN proposes to give nations the power
to tax emigrant income, which would have particularly adverse effects on the United States
because of the large numbers of skilled immigrants.6
As of this writing, all of these tax harmonization schemes have been stymied. The OECD did
convince many blacklisted jurisdictions to sign so-called commitment letters, which ostensibly
obligate low-tax governments to obey OECD dictates, but most of these letters include “level
playing field” clauses stating that the blacklisted nations have no intention of emasculating
their tax and privacy laws unless all OECD nations agree to impose the same misguided
policies.
As originally conceived, with its automatic collection
and sharing of information regarding nonresident investors, the EU savings tax directive would
have created the "level playing field." The EU was forced to withdraw that proposal, however,
and the replacement scheme clearly results in unequal treatment.
But this may be a moot point since the watered-down directive still faces a number of
obstacles. Several nations—most notably the United States – have refused to join the
EU's proposed cartel. This presumably is a death knell for the directive since it is predicated
on unanimous participation from all 15 EU nations and six non-EU nations.
Finally, the United Nations' proposed International
Tax Organization almost surely will never materialize. The right to tax – and the right
to control the taxation of economic activity inside national borders – is the very essence
of national sovereignty, and it is very unlikely that powerful nations will ever surrender that
right.7
The proposal to give governments permanent taxing
authority over emigrants also faces daunting obstacles. Policymakers may not fully understand
why it is misguided to tax flight capital, but they do seem to realize that it is wrong to tax
flight labor.
Benefits of Tax Competition
Tax competition is desirable for a number of reasons.
Most important, it facilitates economic growth by encouraging policymakers to adopt sensible
tax policy. Tax harmonization, by contrast, usually is associated with higher fiscal
burdens.8 For all intents and purposes, advocates of tax harmonization are
seeking to stop the downward pressure on tax rates that is caused by competition.
The history of corporate tax rates in the European
Union is a good example. As early as 1962 and 1970, official reports were calling for
harmonization of corporate tax systems. In 1975, the European Commission sought a
minimum corporate tax of 45 percent. This initiative failed, as did a similar effort in the early
1990s to require a minimum corporate tax rate of 30 percent.9 Today, the
average corporate tax rate in the European Union is less than 30 percent.
The European Union’s treatment of Ireland also
bolsters the view that tax harmonization is a one-way street designed to keep tax rates high. In
an unprecedented move, EU finance ministers voted two years ago to reprimand Ireland for its
fiscal policy – even though Ireland at the time had the EU's biggest budget surplus,
second lowest amount of debt, greatest reduction in government debt, lowest level of
government spending, and lowest total tax burden.10 Most observers felt that
politicians from other nations were upset that Ireland's 12.5 percent corporate tax rate was
putting pressure on them to implement similar reforms.11 Interestingly, there has
never been a reprimand for a country because its taxes were too high.
The benefits of tax competition can be appreciated by
looking at tax policy changes that have swept the world in the past 25 years. Obviously, tax
competition should not be seen as the only factor leading to the following tax changes. In some
cases, it may not even be the driving force. But in each case, tax competition has encouraged
the shift to tax policy that creates more growth and opportunity.12
- The Thatcher–Reagan Tax Rate Reductions. Margaret Thatcher became Prime Minister of
the United Kingdom in 1979, and Ronald Reagan became President of the United States in
1981. Both leaders inherited weak economies but managed to restore growth and vitality with
free-market reforms.
Sweeping reductions in personal income tax rates
were a significant component of both the Thatcher and Reagan agendas. The top tax rate was
83 percent when Thatcher took office, and she reduced the top rate to 40
percent.13 The top tax rate in the United States was 70 percent when Reagan
was inaugurated, and he lowered the top rate to 28 percent.14
The United Kingdom and the United States both benefited from tax rate reductions, but other
nations also profited because they were compelled to lower tax rates – and this shift to
better tax policy is an ongoing process.
Tax competition surely played a role in this global
shift to lower tax rates, and lower tax rates unambiguously have helped the world economy to
grow faster. Even the OECD, which is hardly sympathetic to pro-growth tax policy, has
estimated that economies grow one-half of 1 percent (0.5 percent) faster for every 10-
percentage-point reduction in marginal tax rates.15
- The Irish Miracle and Corporate Rate Reduction in Europe. In addition to reductions in tax
rates on personal income, tax competition has helped to encourage lower tax rates on corporate
income. The Reagan tax rate reductions once again deserve credit for starting the process, and
the table on this page demonstrates that corporate tax rates have fallen dramatically since
1986.
But the Irish Miracle is perhaps the most impressive
evidence of how tax competition advances good tax policy. Less than 20 years ago, Ireland
was an economic "basket case" with double-digit unemployment and an anemic economy.
This weak performance was caused, at least in part, by an onerous tax burden. The top tax rate
on personal income in 1984 was 65 percent, the capital gains taxes reached a maximum of 60
percent, and the corporate tax rate was 50 percent.16
Although these rates were slightly reduced later in the
1980s, the top rates in 1991 were still very high: 52 percent on personal income, 50 percent on
capital gains, and 43 percent on corporate income. At this point, Irish leaders decided that
tinkering with the tax code was not a recipe for success. Over the next 10 years, tax rates
– especially on capital gains and corporate income – were slashed
dramatically.17 Today, the personal income tax rate is 42 percent, the capital
gains tax rate is just 20 percent, and the corporate income tax rate is only 12.5 percent.
These aggressive "supply-side" tax rate reductions
have yielded enormous benefits. The Irish economy has experienced the strongest growth of
all industrialized nations, expanding at an average of 7.7 percent annually during the
1990s.18 The late 1990s were particularly impressive, as Ireland enjoyed annual
growth rates in excess of 9 percent.19 In a remarkably short period of time, the
“sick man of Europe” has become the "Celtic Tiger." Unemployment has dropped
dramatically, and investment has boomed.20
The Irish people have been the big winners. Once a
relatively poor nation, Ireland now enjoys the second highest standard of living in the
European Union. Even the government has reaped benefits. In the mid-1980s, when the
corporate income tax rate was close to 50 percent, it raised revenue barely in excess of 1
percent of gross domestic product (GDP). As the chart on this page illustrates, however,
today’s 12.5 percent corporate tax raises revenue totaling nearly 4 percent of
GDP.21
Thanks to tax competition, Ireland's tax rate
reductions have had a positive effect on the rest of Europe. The Irish Miracle has motivated
other EU nations to reduce their tax rates significantly in recent years. These lower tax rates
will improve economic performance and should encourage European policymakers to make
reductions in other tax rates as well.
- Tax Reform in Eastern Europe. One of the most amazing fiscal policy developments is the
adoption of flat taxes in former Soviet bloc nations. The three Baltic nations—Estonia,
Lithuania, and Latvia—adopted flat tax systems in the 1990s,22 and tax reform
in the Baltics triggered a virtuous cycle of tax competition. Russia followed with a 13 percent
flat tax that took effect in January 2001. Ukraine recently approved a 13 percent flat tax, and
Slovakia is implementing a 19 percent flat tax.23 Even Serbia has a variant of a
flat tax.24
These flat tax regimes, by themselves, will not solve
all the problems that exist in post-communist nations, but the evidence already shows that
good tax policy is having a desirable impact. The Baltic nations, for instance, are the most
prosperous of the nations that emerged from the former Soviet Union.25 The
Russian Federation was the next to adopt a flat tax. Not surprisingly, it is the next most
prosperous of the former Soviet "Republics."26
The evidence from Russia, where the 13 percent flat
tax has produced dramatic results, is particularly striking: Russia's economy has expanded by
about 10 percent since 2001.27 That may not sound like much, but it is rather
noteworthy considering the slowdown in the global economy. The Russian economy certainly
has performed better than the U.S. economy and has easily outpaced the anemic growth rates
elsewhere in Europe.
In addition to faster growth, Russia's tax reform has
had a dramatic effect on tax compliance, something even The New York Times
was forced to concede.28 Over the past two and one-half years, inflation-
adjusted income tax revenue in Russia has grown by about 60 percent, demonstrating that
people are willing to produce more and pay their taxes when the system is fair and tax rates are
low.29
Tax competition has played a role in each of these
success stories. In some cases, the benefits accrue because policymakers want to mimic
success in other nations. In other cases, governments enact good tax policy because they fear
that jobs and capital will leave. Irrespective of motives, however, good tax policy in one
jurisdiction has a positive spillover effect on other jurisdictions.
It is also worth noting that tax competition is a successful tool for economic development.
Hong Kong is perhaps the best example. Extremely poor after World War II, Hong Kong used
market-based policy – including a low-rate flat tax – to boost economic
performance. The results have been dramatic: Hong Kong has been the world's fastest growing
economy in the post–World War II era and currently ranks as the 15th richest jurisdiction,
according to the World Bank.30
The World Bank's rankings are in fact very
instructive. Many of the world's wealthiest jurisdictions, including 11 of the top 16, are "tax
havens" based on the OECD definition. This raises an interesting question: If international
bureaucracies are supposed to be promoting growth, would it not make sense for them to
publicize so-called tax havens instead of persecuting them?
Poison Pill For Tax Reform?
There is a strong effort in the United States to enact a
flat tax, and President George W. Bush's 2001 and 2003 tax cuts move the tax code in that
direction by lowering rates and reducing double taxation of income that is saved and
invested.31 These policies help to make America a magnet for global capital.
Indeed, tax competition is completely consistent with
fundamental tax reform. For instance:
- Tax reform envisions a system with low tax rates on productive behavior. Tax competition
promotes tax reform by helping to drive down marginal tax rates.
- Tax reform envisions a system in which income is taxed only one time. Tax competition
promotes tax reform by helping to eliminate double taxation of income that is saved and
invested.
- Tax reform envisions a system in which governments do not tax income earned in other
nations. Tax competition promotes tax reform by rewarding territorial taxation, the common-
sense notion that governments tax only income earned inside national borders.
- The tax harmonization agenda, however, is a distinct threat to the right of nations to
reform their tax codes and enact single-rate, consumption-based tax systems.32
The tax harmonization agenda certainly means that tax reform would be very unlikely.
- The flat tax, for instance, is a territorial system. Yet the OECD and other international
bureaucracies believe that territorial taxation is a form of "harmful" competition. The flat tax
also eliminates double taxation, but the OECD initiative is designed to help governments
discriminate against income that is saved and invested.
Which Path For Europe?
High-tax European welfare states are the biggest
supporters of tax harmonization. Germany and France even want European-wide taxes
imposed and collected by Brussels. Along with a handful of additional nations, they also
advocate harmonization of personal and corporate income tax rates. Other European nations
are not quite so anxious to harmonize rates, but they certainly seem sympathetic to indirect
forms of tax harmonization such as the EU savings tax directive.
The outcome of the push for a savings tax directive could determine whether Europe’s high-
tax nations are able to cripple tax competition. If the savings tax directive is implemented, it
will be more difficult for taxpayers in high-tax nations to benefit from better tax regimes
outside their borders – especially if the EU manages to convince the United States and
Switzerland to participate in the proposed cartel.
At this stage, it is not clear whether the EU will
succeed. Austria, Belgium, and Luxembourg probably would like the initiative to die.
Switzerland has not embraced the proposal, and the Bush Administration already has
announced that the United States does not support the savings tax directive.
The EU has responded to these obstacles by
weakening its proposal. To appease Switzerland, the EU has offered to permit withholding tax
regimes instead of automatic information-sharing of tax data. The EU also has tried to sidestep
U.S. opposition by asserting that America already is in compliance – a rather odd claim
since interest and capital gains paid to foreigners are neither taxed nor
reported.33
Europe's high-tax nations may be fighting a losing
battle. In May 2004, 10 new nations will join the EU. These countries include many
jurisdictions with tax laws that are designed to boost growth and attract economic activity.
Some of these new member nations, such as Slovakia, Lithuania, Estonia, and Latvia, have (or
will have) flat tax regimes. Other new members, such as Hungary, Malta, Cyprus, and
Slovenia, have elements of their tax systems that are very attractive (such as Hungary's 18
percent tax rate on corporate income). And more changes are on the way. Poland has
announced that it will reduce its corporate rate to 19 percent, and the Czech Republic plans to
lower its corporate tax rate to 24 percent.
Once these new nations are part of the EU, the
competitive pressure on Europe's welfare states will increase because many investors and
entrepreneurs will shift economic activity to take advantage of more favorable tax laws.
Equally important, it will be much harder for the EU to pursue additional tax harmonization
schemes once 10 new nations have voting power. This is especially true if the national veto for
tax matters is not eroded as part of the EU's constitutional deliberations.
Conclusion
The battle between tax competition and tax
harmonization is really a fight about whether government will control the factors of
production. Supporters of tax harmonization would like to hinder the flow of workers and
investments from high-tax nations to low-tax nations. The debate has focused primarily on
capital, particularly on whether governments can track – and tax – flight capital;
there are, however, even proposals that would allow government to tax the other factor of
production – labor – when it crosses national borders.
Some assert that tax harmonization policies are
needed to reduce evasion, but there are two ways to improve tax compliance. The international
bureaucracies want to create a system of automatic and unlimited information exchange among
governments – a system that former House Majority Leader Richard Armey (R-TX)
said would create a "global network of tax police."34 Fundamental tax reform,
by contrast, would reduce incentives to evade while simultaneously reducing opportunities to
evade (because capital income would be taxed at the source).
Ironically, the OECD's staff economists know the
answer. They write that "legal tax avoidance can be reduced by closing loopholes and illegal
tax evasion can be contained by better enforcement of tax codes. But the root of the problem
appears in many cases to be high tax rates."35
Ultimately, this is a debate about the size of
government. Harmonization means higher tax rates and bigger government. Freed from the
rigor of competition, politicians would cater to special interests and resist much-needed fiscal
reforms. This is why the residents of high-tax nations have the most to lose if governments
create an "OPEC for politicians."
Tax competition is the only realistic hope for German
taxpayers, French taxpayers, and Swedish taxpayers. It is quite likely that politicians from
those nations will be fiscally responsible only if they know that labor and capital have the right
to escape fiscal oppression.
ENDNOTES
1. Organisation for Economic Co-operation and Development, Economic Outlook, No. 63
(June 1998).
2. European Parliament, "Value Added Tax (VAT)," Fact Sheet No. 3.4.5, October 19, 2000,
at http://www.europarl.eu.int/factsheets/3_4_5_en.htm.
3. For more information on information exchange and its harmful effects on economic growth,
see Daniel J. Mitchell, "An OECD Proposal to Eliminate Tax Competition Would Mean
Higher Taxes and Less Privacy," Heritage Foundation Backgrounder No. 1395, September 18,
2000, at http://www.heritage.org/Research/Taxes/BG1395.cfm.
4. The OECD is a Paris-based bureaucracy representing 30 industrialized nations. Most of its
members are high-tax European nations. For the text of the OECD's report, Harmful Tax
Competition: An Emerging Global Issue, see
http://www.oecd.org/daf/fa/harm_tax/Report_En.pdf. Many people assume that so-called tax
havens are money-laundering centers. Several government agencies and one international
bureaucracy, however, have analyzed the problem of money laundering and have concluded
unambiguously that low-tax jurisdictions are neither the source nor the destination for a
disproportionate share of the world’s "dirty" money. See Daniel J. Mitchell, "U.S.
Government Agencies Confirm that Low-Tax Jurisdictions Are Not Money Laundering
Havens," Journal of Financial Crime, Vol. 11, No. 2 (Fall 2003).
5. The European Union is a Brussels-based bureaucracy representing the 15-member European
Community. For a description of the EU's "Savings Tax Directive," see
http://europa.eu.int/comm/taxation_customs/publications/official_doc/IP/ip011026/memo0126
6_en.pdf.
6. The United Nations is based in New York and professes to represent the entire world. For
the text of the UN proposal, see http://www.un.org/esa/ffd/a55-1000.pdf.
7. For more information on the UN scheme, see Daniel J. Mitchell, “United Nations Seeks
Global Tax Authority,” Prosperitas, Vol. I, No. II (August 2001), at
http://www.freedomandprosperity.org/Papers/ un-report/un-report.shtml.
8. It is possible that harmonization could be used to limit tax rates. In the European Union, for
instance, value-added taxes may not exceed 25 percent.
9. European Parliament, "Personal and Company Taxation," Fact Sheet No. 3.4.8, October 19,
2000, at http://www.europarl.eu.int/factsheets/3_4_8_en.htm.
10. "International Commentary: Bully Europe," The Wall Street Journal Europe, March 6,
2001, at http://www.freedomandprosperity.org/Articles/wsje03-06-01/wsje03-06-01.shtml.
11. Therese Raphael, "Irish Economy Creates a Pot of Gold," The Wall Street Journal,
December 30, 1998.
12. Researchers have discovered that tax competition is a primary cause of lower tax rates. See
Michael P. Devereux, Ben Lockwood, and Michela Redoano, "Do Countries Compete Over
Corporate Tax Rates?" mimeo, University of Warwick, 2002.
13. Jim Gwartney and Robert Lawson with Walter Park and Charles Skipton, Economic
Freedom of the World: 2001 Annual Report (Vancouver: Fraser Institute, 2001); data retrieved
from http://www.freetheworld.com.
14. For more information on the Reagan tax cuts, see Daniel J. Mitchell, "Lowering Marginal
Tax Rates: The Key to Pro-Growth Tax Relief," Heritage Foundation Backgrounder No. 1443,
May 22, 2001, at http://www.heritage.org/Research/Taxes/BG1443.cfm.
15. Willi Leibfritz, John Thornton, and Alexandra Bibbee, "Taxation and Economic
Performance," Organisation for Economic Co-operation and Development, Economics
Department, Working Paper No. 176, 1997.
16. Historical tax data provided by e-mail from the Economic and Budget Division of the Irish
Finance Department, March 29, 2001.
17. For a thorough history of Irish economic reform, see James B. Burnham, "Why Ireland
Boomed," The Independent Review, Vol. VII, No. 4 (Spring 2003), pp. 537–556, at
http://www.independent.org/tii/media/pdf/tir74burnham.pdf.
18. Organisation for Economic Co-operation and Development, OECD in Figures, 2002, at
http://www1.oecd.org/publications/e-book/0102071E.PDF.
19. Burnham, "Why Ireland Boomed"
20. Benjamin Powell, "Economic Freedom and Growth: The Case of the Celtic Tiger," The
Cato Journal, Vol. 22, No. 3 (Winter 2003), at http://www.cato.org/pubs/journal/cj22n3/cj22n3-3.pdf.
21. Eric Engen and Kevin Hassett, "Does the Corporate Tax Have a Future?" Tax Notes,
Spring 2003, at http://www.aei.org/docLib/20021222_raengehass0212.pdf.
22. "Eastern Tax Enlightenment," The Wall Street Journal Europe, July 7, 2003.
23. Alvin Rabushka, "The Flat Tax in Russia and the New Europe," National Center for Policy
Analysis, Brief Analysis No. 452, September 3, 2003, at
http://www.ncpa.org/pub/ba/ba452/ba452.pdf.
24. Republic of Serbia, Ministry of Finance and the Economy, Individual Income Tax Law, at
http://www.mfin.sr.gov.yu/html/modules.php?op=modload&name=Subjects&file=index&req
=viewpage&pageid=213.
25. Gross national income per capita, 2002, Atlas Method, in World Bank, World Development Indicators, July 2003.
26. Ibid.
27. Alvin Rabushka, "The Flat Tax at Work in Russia: Year Two," The Russian Economy,
February 18, 2003, at http://www.russiaeconomy.org/comments/021803.html.
28. Sabrina Tavernese, "Russia Imposes Flat Tax on Income, and Its Coffers Swell," The New
York Times, March 23, 2002.
29. Alvin Rabushka, "The Flat Tax at Work in Russia: Year Three, January–June 2003," The
Russian Economy, August 13, 2003, at http://www.russiaeconomy.org/comments/081303.html.
30. Gross national income per capita, 2002, Atlas Method, in World Bank, World
Development Indicators, July 2003.
31. For more information on tax reform, see Daniel J. Mitchell, "Jobs, Growth, Freedom, and
Fairness: Why America Needs a Flat Tax," Heritage Foundation Backgrounder No. 1035, May
25, 1995.
32. For a comprehensive analysis of this issue, see Daniel J. Mitchell, "Tax Reform: The Key
to Preserving Privacy and Competition in the Global Economy," Institute for Policy
Innovation, Policy Report No. 171, February 7, 2002, at
http://www.ipi.org/ipi/IPIPublications.nsf/PublicationLookupFullText/C9BD6A1A962A316D
06256B590025A9A9.
33. For more information on America's status as a tax haven, see Marshall Langer, "Who Are
the Real Tax Havens," Tax Notes International, December 18, 2000, at Center for Freedom
and Prosperity, http://www.freedomandprosperity.org/Articles/tni12-18-00.pdf. See also
Daniel Mitchell, "The Adverse Impact of Tax Harmonization and Information Exchange on
the U.S. Economy," Prosperitas, Vol. I, No. IV, November 2001, at
http://www.freedomandprosperity.org/Papers/taxharm/taxharm.shtml.
34.Letter to Treasury Secretary Paul O'Neill, March 16, 2001, at
http://www.freedomandprosperity.org/ltr/armey/armey.shtml.
35. Organisation for Economic Co-operation
Daniel J. Mitchell, PHd, is the McKenna Senior Fellow in
Political Economy, The Heritage Foundation, where he is the chief expert on tax policy and economy.
He is the author of The Flat Tax: Freedom Fairness, Jobs and Growth. Mitchell's by-line can be found
in such national publications as the Wall Street Journal, New York Times, Investor's Business Daily and
Washington Times. He is a frequent guest on radio and television and a popular speaker on the lecture
circuit. Mitchell holds a Ph.D in Economics from George Mason University and Masters and Bachelors
degrees in economics from the University of Georgia. Mitchell was an economist for Senator Bob
Packwood and the Senate Finance Committee. He also served on the 1988 Bush/Quayle transition team
and was Director of Tax and Budget Policy for Citizens for a Sound Economy. .
This speech was delivered at the 2005 International Society for Individual Liberty's Freedom
Summit in Gummersbach, Germany – July 15-20, 2005.
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