The Lure of the Commons

Reinforcing the home attachment

In old English law, the common (or commons) was an expanse of ground shared by residents of a village, held in common for the good of all. That lies behind the name, for instance, of the Boston Common, the oldest city park in the United States. The concept has lately been raised one order of magnitude to encompass such global things as the atmosphere, the oceans and the like. One speaks nowadays of “global commons”.

But why stop at the natural sort? Talent, for one thing, is also a global common, as is capital—financial and investment capital, a.k.a. the mobile tax base. As with the green commons of old, these are all terrains with not-well-defined property rights and succulent enough that each country would love to graze on them. The one difference is that in the old times you had to go to the common to enjoy its benefits. The modern sort is mobile, and in an increasingly globalised world you can actually lure portions of these commons—and the benefits they bestow—over to your own patch. It pays then to study the strategies to get, or retain, as large a piece of the common pie as possible.

This is what CESifo researcher Kai A. Konrad has just done. As he observes in his latest CESifo Working Paper, countries use tax rates and investment subsidies to try to acquire a larger share of this mobile tax base, in effect giving rise to tax competition in a way akin to price competition between firms. But this can be very onerous for the countries that lower their rates too far.

So countries also use other means to compete, some of which essentially treat the mobile tax base as a common-pool resource—and in the process help to relax the fiscal competition pressure. The idea is to stake a claim over this resource by seeking to influence the allocation of property rights to it. To achieve this, countries have stolen a leaf from the book on marketing strategies of business firms, turning to efforts such as advertising, branding, and stoking customer (ie, taxpayer) loyalty. The latter is a neat twist, playing the “guilt card” a bit by appealing to patriotism.

Country advertising is fairly widespread (our illustration shows a German example). It varies from being informative, such as simply letting the reader learn what the tax rates in a given jurisdiction are, for instance, to subtler ones that aim at building up a particular image, making the country “special” in the eyes of potential investors or taxpayers.

Brand management, in turn,  is more established than you think: there is even a regular tracking of their relative worth, such as that performed by The Anholt National Brands Index, which publishes the brand values of 30 major nations on a quarterly basis. According to it, the brand value of the United States in 2006 exceeded 17 trillion dollars. Germany’s, while lower, was still one hundred times the market value of Coca Cola.

Many factors influence the value of these brands. Proficiency in sports, economic performance, and scientific competence all play a role, as does the hosting of major events such as the Olympics or World Soccer Championship. Seen in this light, the sometimes costly efforts of many countries to become the next host for such events can be regarded as a sound investment.

And then there is loyalty, which when it comes to countries is known as patriotism, a concept that raises hackles in some quarters but that is pursued with zest in others. (That is perhaps the reason behind the trend of speaking of "home attachment" instead of plain old patriotism.) Patriotic considerations can dissuade taxpayers from taking their wealth elsewhere. On the other hand, good advertising from other countries can prompt taxpayers to be a bit less patriotic and decide to “relocate” their funds.

As stated previously, this type of loyalty has a further useful function for the countries that cement it successfully: it moderates what would otherwise be cut-throat competition in lowering tax rates with the purpose of retaining the tax base of its citizens. In other words, if its citizens are loyal, a country can afford to keep somewhat higher tax rates without risking a stampede of taxpayers to greener pastures.

But, as Mr Konrad points out, higher loyalty among own citizens is a strategic disadvantage in the global-scale tax competition game: on the one hand, thanks to your citizens loyalty you can afford not to lower your tax rates too much, but that very fact makes your country less attractive for citizens from other jurisdictions.

As he concludes, if home attachment is simply a means to raise the mobility cost to a prohibitely high level, investment in such citizen loyalty is wasteful from a global point of view. "But in a second-best world such investment may be beneficial as it allows countries to collect higher tax returns from their citizens in the Bertrand equilibrium." So, it seems, such home attachment investment strategies are here to stay.

Kai A. Konrad: Mobile Tax Base as a Global Common, CESifo Working Paper No. 2144

• Other CESifo Working Papers dealing with tax competition
• Other CESifo Working Papers by Kai A. Konrad
• CESifo Working Papers published in the past three months