[ghgdynb1]

The point is that effective tax rates can be really subtle.

For instance, you could have a country change what it considers to be “profit” so that you’re paying $2 on $100 of revenue, whereas in the neighboring country you’d be paying $6. Same nominal tax rate, different effective tax rates.

There are even more ways to play this: “Sure, we tax you at the required 20%, but you can then direct how those funds are used to reduce costs you’d otherwise have to pay directly.”

And this happens a ton— see the WTO and “effective” but not nominal tariffs.

[scsilver]

Thanks for the insight, what would be the danger of the happy path solution where these effective vs nominal rates arent factored in. Some countries have a huge advantage in certain industries?

[ghgdynb1]

Happy you found it helpful! The final section (imposters) of this [1] simplified exploration of “green beard altruism” might be of interest to you if you want to explore this further. If you’re interested in thinking about things like this generally, these are Nash equilibrium problems and the field is called game theory.

In answer: if we do discard the assumptions of game theory and we imagine nobody would ever think to “cheat,” it could work. But in reality it wouldn’t be just that some countries have huge advantages in some industries— they would have huge advantages in every industry. People and companies looking to maximize their opportunities would flee to the country with the lowest effective (nominal doesn’t matter) tax rate which could also guarantee their safety.

This is actually part of how the US ended up burying the Soviet Union/eastern Bloc with economic productivity— we kept poaching all their best engineers, scientists, mathematicians, and entrepreneurs.

[1] https://m.youtube.com/watch?v=goePYJ74Ydg