An Evolutionary Approach to Comparative Taxation: Theory, Methods and Agenda for Research

The paper aims to contribute an additional layer to the current debate on tax harmonization versus tax competition by adopting a comparative evolutionary analysis to explain corporate tax innovation as a result of tax competition. Not only do countries compete to attract investment, corporate tax solutions also compete and selectively evolve as a result of this competition (for example, exemption of dividends may prevail over the imputation system, or different kinds of ratios may be available to solve the common problem of limiting interest deductions). Legal change is prompted by tax solutions that have been imported from other countries (so-called “tax transplants”) and results in a “circulation of tax models” which creates a continuous relationship at the global and local level. This is essentially a “bottom-up” approach to tax competition which challenges the idea that tax reforms are exclusively a “top-down” solution to local problems. Section 2 discusses in detail an evolutionary concept of tax competition among domestic corporate tax solutions and sets out the view that competitive selection does not amount to a form of struggle among tax solutions but that it is mediated by complex institutional processes. Sections 3 and 4, examine the outcomes and patterns of such tax competition and evolution, namely tax convergence (stabilizing selection) and tax divergence (disruptive selection) of various corporate tax policies; the paper also considers the strategic equilibrium between tax change and tax continuity within the framework of the tax evolutionary process, by which we mean competition among tolerably fit corporate tax solutions. In this light the paper discusses in detail in sections 5 and 6 how corporate tax transplants operate as vehicles of evolutionary change, as well as the role of local elites in implementing them. The paper concludes in section 7 with a few proposals for an agenda of empirical comparative research in three different areas: cluster analysis of corporate taxes; analysis of corporate tax transplants; and field studies connected to corporate tax design.