Journal of Australian Taxation

Criticism is often levelled against countries that engage in tax competition by claiming it is a means for the wealthy to dodge financial obligations. However, this reputation overshadows the vital benefits it has for small countries. The aim of this paper is to demonstrate that tax competition is a valuable tool for small and developing countries. Before exploring this, tax competition and other key concepts will be defined. Then, the relationship between tax competition and the government will be analysed. Public choice theory will be used to show that governments often function as self-serving monopolies, and so competitive policies improve their efficiency. Next, game theory will be used to show that small countries are the winners of tax competition. However, this paper narrows this typology down further to small, developing countries with a lack of resources. Due to their lack of size, resources and infrastructure, these countries have little choice but to rely on tax competition for capital injection necessary for their development. This capital injection comes in the form of Foreign Direct Investment, which creates several positive spill-over effects within the economy and leads to sustainable and long-term growth. Unfortunately, due to the movement against tax competition, several governments have banded together to try to limit it. Some potential pathways for reform and the impacts that they might have on small countries will be considered. This paper concludes with a suggestion for a final proposal that is most practically feasible.