CP uniquely avoids profit shifting, tax competition, and insufficient social expenditures

From a global perspective, uncoordinated tax interactions among independent jurisdictions, with their different objectives, often lead to unsatisfactory outcomes. To illustrate, if a country lowers its tax on capital, it attracts tax bases from other countries in the form of real capital or “paper” profits, even without real capital movement (that is, profit shifting). The corresponding contraction in the other countries’ tax base lowers those countries’ tax revenues. Also, spillovers do not end with profit and capital movements. The other countries are under pressure to lower their capital taxes, too, with further repercussions. A similar interaction can occur in the context of taxing the rich. This “race to the bottom”—which can result in inefficiently low taxation and hence insufficient public investments and social expenditures (Keen and Konrad 2013)—has been reflected in the downward trends of corporate and top personal income tax rates (Figure 2.1).

Depending on context and specifics, international coordination on the level or location of taxation can improve global outcomes with or without disadvantaging some countries. In federations, tax competition can be alleviated, and compensation can take place through fiscal transfers between subnational governments or through central policies. However, countries need to find common ground in coordination and be guided by economic assessment to understand global and country-specific effects. The ideal assessment entails comparing coordination options not only with the status quo, but also with counterfactuals of futures, with and without coordination. For example, unchanged policies may be more beneficial now but less beneficial in the future relative to coordinated outcomes.