It's a balancing act, not (just) an arms race. As a government, raise corporate taxes too high, and corporations leave and/or overseas corporations outcompete them and/or new corporations form overseas instead of domestically. Raise tariffs too high, and domestic consumer choice and quality decrease, and consumer purchasing power decreases. These aren't consequences that dissolving your domestic corporations or jailing their managers address.
>As a government, raise corporate taxes too high, and corporations leave
Only when there's almost no cost to leaving, which in itself is a tax loophole. If you declare that residency is about where you do the most business and has nothing to do with which letterbox has the word "headquarters" on it then their reaction would be limited to tantrums in Wall Street Journal op eds.
>or overseas corporations outcompete them
That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
>>As a government, raise corporate taxes too high, and corporations leave
>Only when there's almost no cost to leaving, which in itself is a tax loophole. If you declare that residency is about where you do the most business and has nothing to do with which letterbox has the word "headquarters" on it then their reaction would be limited to tantrums in Wall Street Journal op eds
Or to the other two arms of the disjunction in the text that you elided.
>>or overseas corporations outcompete them
>That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
It has to come from somewhere. It can come from owners, workers, or consumers. If it came from consumers (higher price or lower quality for products and services) this would affect the competitiveness in a straightforward way. [1] and [2] claim that it instead comes from owners and workers, with considerable uncertainty about the ratio between those. If it comes from owners, it increases the corporation's cost of capital – but only to the extent that investment is global. If it comes from workers, it decreases the ability for the corporation to compete for labor – but only to the extent that labor is global. So you're correct that it does not affect competitiveness in a sufficiently non-global economy.
It is collected from owners. Tax collection and tax incidence are separate issues. In economics parlance, where tax "comes from" or "falls on" refers to tax incidence, not tax collection.
Tax collection and tax incidence are indeed separate issues.
The tax incidence falls on owners - probably at least until profit taxes reach ~80% or capital became magically very scarce for some reason that clearly doesn't apply to the present day.
>That's not how corporation tax works. It's paid on profits and does not affect the competitiveness of the firm.
Corporations often need to raise money from investors, who will rationally only fund corporations that are expected to generate enough profit to produce a good enough return for the risk and so on. If profit is lower in some countries, that reduces the amount of money going to investment in that country as the potential reward has gone down. Therefore such companies are less competitive in fundraising.
