The paradox of capital neutrality as a reason for the offshorization of economies

Abstract

This article discusses such a phenomenon as the paradox of capital neutrality and its impact on the offshorization of economies. The principle of capital neutrality aims to reduce tax barriers between economies in such a way that the choice of investment location is determined not by taxation, but by economic reasons. The paradox of capital neutrality refers to the process by which one country’s desire for neutrality (lowering barriers to the movement of capital) can actually increase the incentives for tax competition for other countries, which ultimately undermines the benefits that capital neutrality seeks, or worse, leads to an even less efficient allocation of resources than if nothing changed. At the same time, no amount of cooperation between countries slows down tax competition. Moreover, this means that the more cooperation between rich countries in maintaining capital neutrality, the greater will be the incentive for poorer countries to compete for the tax base.