In his new book, Policy Responses to Tax Competition (The University of Chicago Press), UC Irvine economist David R. Agrawal and co-editors examine effects of tax competition designed to attract business and residents. The work brings together leading scholars to assess when tax competition promotes efficiency and when it undermines fairness and fiscal stability. Below, Agrawal discusses what motivated the project, key findings, and the policy implications that emerged.

Q: What motivated you and your co-editors to take on the issue of tax competition, and what fundamental question were you hoping this book would answer about how jurisdictions design taxes on mobile economic activity?

A: I have spent most of my career studying the effects of tax competition as well as policies that may limit its harmful effect. In the presence of globalization, digitalization, and declines in mobility costs, tax competition has changed how we think about tax policy. Recent policy interventions at the international level, such as the global minimum tax, as well as coordination measures within federal systems, have shown a desire to limit the negative effects of competition. Although the literature on tax competition is vast, there are relatively few clear conclusions about when government intervention to limit tax competition promotes efficiency, and even fewer analyses that consider distributional consequences. We hoped this volume would fill this gap and highlight the importance of understanding how governments can manage the pressures of tax competition through possible coordination of policies.

Q: In gathering empirical evidence and case studies from different tax policies and agreements—such as the Kansas-Missouri pact or the OECD’s BEPS initiative—what did you discover about how governments actually respond to tax competition, and why are these findings significant?

A: Governments often enter into tax treaties to try to limit the effects of tax competition or seek to reduce the mobility of the tax base by taxing more immobile factors. Within federal systems, the ability of states or the federal government to limit competition is more common, including restrictions on available taxes, intermunicipal cooperation, or minimum taxes. But recent international headlines have also shown that governments can reach a consensus on minimum tax rates for corporate income.

Q: Tax competition can both drive efficiency and create harmful revenue shortfalls. How does this volume help clarify when tax competition becomes a problem, and what kinds of policy responses or frameworks emerged as the most promising solutions?

A: Competition among governments can be a good thing because it allows governments to be innovative and gives households a choice over the level of public services they wish to consume. Of course, competition can also be useful when governments are corrupt or Leviathan-like in nature. But competition is problematic when cutting one jurisdiction’s tax rate imposes a large fiscal externality on others—this is likely to occur when the tax base is extremely footloose. Declines in mobility costs and the ability to consume goods from around the world have heightened these competitive forces. There is no one-size-fits-all solution, and the book discusses many possibilities. In our introduction to the book, we classify three different types of interventions: those requiring the explicit agreement of two or more governments (e.g., treaties), those that can be imposed by an external actor (e.g., a minimum tax imposed by the EU on member states), and those that can be adopted uniformly (e.g., mobility restrictions). A key lesson from our review of policies is that their effects depend on a number of key economic parameters, such as the elasticity of the tax base with respect to the jurisdictional tax rate, and the cross-effects of changing one tax rate on other tax bases. We also note that both efficiency and distributional effects are important, in part because the distributional effects may be critical determinants of whether particular policies can secure political support and be adopted.

Q: The book explores not just economic outcomes but strategic reactions and distributional effects. What wider implications do your findings have for policymakers or international cooperation, and what questions remain for future research?

A: Currently, there are many policy discussions about how to respond to tax competition. Two areas for future research emerge. While much of the literature has focused on a single tax instrument and a single policy response to limit competition, this narrow focus often misses the complexity of tax systems. Governments offer a package of services and raise revenue from many sources. The presence of multiple taxes may necessitate nuanced policy responses, and multiple policy responses can interact such that the totality of the intervention may have larger effects than the sum of the individual parts.

Q: Looking ahead, what do you hope policymakers, researchers, or even the general public will do with the insights from this volume? Are there specific actions or shifts in thinking you hope this book will inspire moving forward?

A: The book takes an international perspective and attempts to study policy responses to tax competition in the context of different countries. Policymakers have much to learn from the international perspective regarding what has and has not worked. Further, while an ideal policy intervention would make every jurisdiction better off, such a Nirvana outcome likely demands too much. For this reason, policy attempts to limit tax competition among jurisdictions will create winners and losers, but overall well-being and tax revenues in the federal system or world as a whole will be much higher.