Friday, October 27, 2006
Around the world, the tax laws are shaped by concerns with competitiveness. This paper provides a general theory of how taxes impact competitiveness. As part of that theory, this paper also introduces the concept of tax-based competitiveness neutrality. A tax system is competitively neutral when taxes do not cause competitors to change their relative valuations of any investments. This paper then shows that the requirements for tax-based competitiveness neutrality depend upon whether the competition is occurring between investors or conduits. Generally speaking, the requirements for neutrality are stricter when the competition is between conduits than when it occurs between investors. This paper then uses the theory developed in the first part to analyze two sets of laws that were heavily influenced by competitiveness concerns. They are the unrelated business income tax (UBIT) and the tax treatment of cross border transactions. In both areas, the failure to recognize the nature of the competition has caused policymakers and scholars to make incorrect statements about how taxes influence competition.