Cheaper tax incentives drive the exploitation of poorer countries’ land and resources

One problem with this strategy is that it might lead to a "race to the bottom." If one country seeks to attract foreign investment by offering preferential tax treatment (that is, by taxing foreign investors less heavily than it taxes resident investors), other countries might be more generous still. The ultimate consequence might be that countries go on cutting the taxes they impose on foreign investors until the benefit they derive is reduced to zero. Thus, tax competition, rather than facilitating growth in poor countries, might merely enable firms from rich countries to go on exploiting the resources of poor ones (land, labor, minerals, and so on). Indeed, perhaps the principal effect of such incentives is to make such exploitation more profitable than before. In other words, tax incentives targeted at foreign investors, far from alleviating poverty, might perpetuate and even exacerbate it.' If developing countries succeed in attracting foreign investment, this could entail negative consequences for the country of residence of the foreign investor. For example, a firm might close down a factory in a high-tax rich country and establish a new one in a low-tax poor country. From the rich country's point of view, the consequences might include both (a) a decrease in economic activity generally (manifesting itself in job losses, in particular) and (b) a fall in government revenue. It is not surprising, then, that the rich countries have watched with some discomfort the efforts of the developing countries to attract foreign investment by means of tax incentives.