Tax competition, foreign direct investments and growth: Using the tax system to promote developing countries

Sustained growth is the key to improving the situation in poor countries. The neoclassical growth theories and the lack of success of the past 50 years in using them to promote growth in developing countries is discussed. New growth theories postulate that technology is the engine of growth. Developing nations should try to attract foreign investment by offering zero or very low corporate tax rates. Low tax rates are appropriate only for corporations in sectors generating spillover effects. Tax incentives, like any other market intervention, are justified if they correct market inefficiencies, or generate positive externalities. The transfers from rich to poor countries can be further increased by imposing limitations on rich countries' ability to engage in tax competition with poor countries. The story of Ireland demonstrates the great potential and optimism at the core of the new growth theories.