Tax rate competition

Many countries are trying to put forward their tax reforms. There are many motivations: to stimulate investment, to attract foreign investment, to comply with the agreement with the IMF, to limit the governemnt spending capacities, etc. Tax reforms include lowering corporate tax (for example, France's proposal, Colombia), boarden tax base (eg. Hong Kong), introducing flat tax (eg. Estonia, Russia and China's recent study), etc.

So, can we reach a perfect compeition situation finally on tax competitions among countries? In other words, will we reach a point that all countries charge the same tax as others and provide the same service to everyone. Investment is identical from tax consideration among all countries.

Think about product market under perfect competitions: many firms, many consumers, homogenous product, good firms stay, bad firms exit, profit drives to zero in the long run.

The one condition I am interested is the free entry and exit. What does it mean when we face a "inefficient" government? Under democratic institution, that means it will be replaced through election. But there are too many evidence that the government came to power under democracy is not for the people, but for the big interest groups. Put it in a board prospective, can we "import" a new government from a foreign country if our government is inefficient. Or can we import the service from a foreign government like national defense or social security? This seems not possible as well.

What it implies is that tax competition may not reach our perfect competition outcome both in local and global sense. At some point, when the competitions among countries are too severe, we should expect the loser countries will be in trouble. Even though the whole pie may increase, they get a smaller slice. They are not able to collect enough revenues from tax (as the investments moved to winner countries). They are not able to provide basic service to thier citizens (the citizens are unable to buy social security from the winner countries).

Of course, the winner countries will have a bigger pie, and a bigger slice of the pie. both the government and citizens are happy. Wealth/income inequality will rise unless we have more institional/political adjustment to allow more free entries and exits or more flexible imports.