The Race to the Bottom: Incentives for New Investment?

Abstract

Tax competition is one of the strongest credo of orthodox economic policy. However, empirical evidence suggests that tax incentives are not effective as tools for attracting foreign direct investment, but instead promote a race to the bottom in taxation of corporate profits, whilst also harming democratic forms of government and the ability of states to provide public services to their citizens. Tax competition is accompanied by a fierce regulatory competition leading to a race to the bottom on international financial regulation. The latter has facilitated the establishment of a huge shadow banking system which lies at the root of the present international financial crisis. A pro-poor development consensus needs a new tax agenda. The Follow-up International Conference on Financing for Development in Doha (End of November /early December 2008) offers an opportunity to bring taxation to the heart of the development discourse. The Tax Justice Network has taken a lead role in promoting this dialogue.