Greg Mankiw, commenting on international tax competition, writes:
This issue goes well beyond economics to questions of political economy and political philosophy. If you think it is the job of government to take from Peter to pay Paul, and if Peter can move around the globe, then you need international tax cooperation. Otherwise, some countries will become nations of Peters, leaving all the Pauls to fend for themselves. On the other hand, if you think that the main job of government is to facilitate voluntary exchange by protecting property rights, rather than re-slicing the economic pie as it sees fit, then tax competition is a good check against excessive interventionism. In other words, are you more worried about too little government or too much?Or maybe you think it's the job of the government to not only facilitate voluntary exchange by protecting property rights, but to do other stuff too (like, say, provide for a national defense, or put murderers in prisons). And maybe, just maybe, the government needs money to do some of that other stuff. Now I don't want to get too crazy here, but maybe the best way to collect the money -- dare I say the most efficient way? -- is through a system of progressive taxation. Of course, then the government would be protecting property rights and "tak[ing] from Peter to pay Paul." What a weird world that would be! Luckily, we don't have to worry about the implications of international tax competition in such a world, because that world obviously doesn't exist. But pretend for a moment that such a world does exist: that governments both protect property rights and take from Peter to pay Paul. Then some countries would still become nations of Peters, leaving all the Pauls to fend for themselves (because the Peters would leave any country that slices the economic pie). That would make it impossible for countries of Pauls to have an efficient system of progressive taxation, seeing as they would lose all vertical efficiency in their tax codes. Is it possible, then, that all-out international tax competition might not be such a hot idea? Nah. We better stick with the "slicing-the-economic-pie vs. growing-the-economic-pie" example. It's much more realistic that way.