In times of financial crisis and Covid-19, governments have constantly – and significantly – increased their spending. Up to now most of it has been financed by debt and, in many instances, by Central Banks. But sooner or later the state will have to turn to taxes to be able to pay for its fiscal largesse.
Centralization and tax harmonization, which have already been pushed by leading governments and international institutions since the financial crisis, will be ever more on top of the political agenda. In this context, further steps have been taken to introduce a global minimum tax for companies. At the same time, competition is believed to be one of the few effective instruments to keep check on the power of politicians and the state. Institutional competition also allows governments to be closer to the needs and preferences of their respective populations and fosters policy innovation.
There are numerous studies showing the advantages of competition between jurisdictions, especially on the national level in the form of fiscal federalism. Examples for the latter are the US and Switzerland, where the division of the power to tax and spend across several layers of government has shown good results for a long time. But are these insights still valid in extraordinary times of economic crises, zero interest rates and Modern Monetary Theory? Can fiscal competition even be a useful concept for supranational organizations like the European Union? To what extent will the pressure to harmonize taxes and possibly even the level of government spending work? And what will be the effects on countries which are fiscally decentralized?
