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MENTAL MODEL · M3477

Tax Competition

Tax Competition
BusinessHigh supportPublic Economics
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Updated 2026-07-31

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INTRODUCTION

English translation pending.

CORE DEFINITION

A phenomenon in which jurisdictions compete for mobile tax bases, such as capital, firms and high-skilled workers, by lowering tax rates or granting preferential treatment. Because the tax base can move, each jurisdiction faces an incentive to undercut its neighbours, and the collective result can be a race to the bottom that reduces public revenue and the quality of public services. The theory underpins international cooperation on minimum corporate tax rates and information exchange. Competition is not always harmful, since it can discipline inefficient governments, but its fiscal cost rises with the mobility of the base.

SCAFFOLDING EFFECT

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- Mobility Check: identify which parts of the tax base can actually leave the jurisdiction. - Long-Run Costing: estimate the revenue you lose if neighbouring jurisdictions match your cut. - Cooperation Option: consider minimum rates or information exchange instead of unilateral rate cuts.

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When a tax base can move, the jurisdiction that cuts rates captures a larger share of it. Each government therefore gains by undercutting, but when all of them do so the base stays roughly the same and rates fall everywhere. Revenue declines without any change in investment, which weakens the public goods that made the jurisdiction attractive in the first place. The race continues as long as the base is mobile and no coordinating rule sets a floor.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Tax_competitionZH · Explicit
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