Taxes and International Competitiveness

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The term "international competitiveness" has long been an important part of tax policy debates and most recently has been prominent in discussions about fundamental U.S. tax reform. For example, President Bush has stated that one goal of reform should be to "strengthen the competitiveness of the United States in the global market place." And, in announcing its 2006 hearings on tax reform, the House Ways and Means Committee indicated that one focus of the hearings would be competitiveness. Yet despite the prominence of the term "competitiveness," its meaning is often vague, with its definition frequently depending on the perspective of the user. This report looks at competitiveness from three different perspectives: that of individual domestic firms, multinational corporations, and domestic labor. In each case, the report then applies economic analysis to the competitiveness concept, which adds clarity by identifying the specific ways in which taxes affect international trade and investment. With trade, tax burdens can affect what is traded, its overall level, and who benefits from trade, but they do not directly affect the trade balance. Further, it is the pattern of relative U.S. taxes within the domestic economy that matters for trade, not how a firm's taxes compare with those of its foreign competitors. With investment, taxes can affect the extent to which U.S. firms establish operations abroad and can affect economic efficiency and welfare as well as the distribution of income within the domestic economy and between the United States and foreign countries. This report explains basic economic principles and will not be updated.