Chapter Eight: The Future Of The State

IV. Competition Between Nation States

There are real respects in which countries can compete with each other – geographic, developmental and specialist – as noted above. There is however another dimension of inter-country competition which will become important, and that is the competition for tax-paying residents. As explained in Chapter Three, Fiscal Globalization, the increasing burden of taxation in the 20th century led to the emergence of 'escape routes' both for companies and individuals through 'offshore' and other low-tax structures; and the attempts of high-taxing countries to head off the escapees have been largely futile. This process is accelerating, and the high-taxing, populous countries will be left with expensive welfare support systems but with fewer and fewer taxpayers who are willing to pick up the tab.

One of the most salient features of countries' economic well-being over the next 50 years will therefore come to be the state of their welfare systems. With some individual differences, most countries are starting from the same point: near-bankrupt state pension schemes; lengthening life expectancy; diminishing proportions of wage-earners to pensioners; increasing demands on health, education and welfare provision. By and large, their response to this oncoming problem so far has been to increase taxes; but that process is reaching its limits.

Welfare systems, now nearly universal in the developed world, were one of the most recent adventures of the nation state onto the turf of private, usually collective provision. State education is barely 100 years old, while state health schemes are even younger. The enormous expense and parlous state of these public systems provides a vivid demonstration of the unfortunate consequences of detaching the provision of personal economic goods from the local, human-scale organisations that had evolved in response to demand. They display 'the tragedy of the commons' writ large, among their other failings.

Most people are dissatisfied with State provision of education, health, unemployment insurance and retirement benefit. As they become richer and more mobile, and nation-based schemes become less appropriate for them, they will jump at the chance of making individual arrangements, or joining collective schemes tuned to the needs of small groups of users.

Large parts of the provision of welfare will become a private matter for increasing numbers of people over the next 30 years. While nation states continue to use 'pay as you go' models for the financing of welfare benefits (amazingly, even for pensions, which is most improvident behaviour in the face of lengthening life-spans) richer people already make their own arrangements for most aspects of welfare. The visible evidence of this is a huge pile of benefits-related assets in the form of investment funds and insurance company or bank capital. These assets, often held in low-tax areas or in 'pass-through' funds, are used to finance retirement goods such as real estate or pensions, as well as being used to secure life-style levels prior to retirement and to pay for health-care.

No-one is quite able to measure the mountain of personal wealth or its growth rate, but such evidence as there is points to growth rates in terms of the numbers of wealthy people and their total assets which utterly eclipse general rates of economic or population growth. Unless something happens to unbalance this equation, and it is hard to see what that something might be, a time will come when nation states experience reducing demands on welfare provision simply because there are so many rich people around. This will be the situation in the second half of the 21st century. But we have to get there from here!

Between 2030 and say 2050, there will be an intermediate phase, in which people are highly mobile, but still demanding in welfare terms, and nations will compete for them. Of course, for there to be competition, there must be alternatives for the consumer. A Serbo-Croat-speaking national of Serbia has few of those at present in terms of where to live. But Serbia will join the European Union in time; universal language translation software will be widely used from about 2020; and most young people, even in Serbia, are learning English anyway.

People in many developed parts of the world are already more fortunate, especially if their mother countries had colonies or empires. Americans, Canadians, Australians, French, German, Spanish and the British have considerable freedom to wander. People from less developed regions are less free, indeed, but many of them become economic migrants, as has always been the case. Of course, wherever you come from, if you have money you can go and live anywhere you want except for the Vatican, perhaps, and even that can probably be arranged.

The rapid development of 'offshore' during the last 50 years points the way in terms of human mobility, at least among economically well-off individuals. Survey after survey in high-tax countries shows that high proportions of people either would like to or are actively planning to move elsewhere – the 'elsewhere' usually being a low-tax area and often warmer as well.

It's a complicated picture at present. Cold, over-taxed people from Canada go to Florida or Barbados. Retirees from Yorkshire go to Cyprus. Lithuanians flock to the UK now that they're allowed to. Russians go almost anywhere else once they can afford it. Tajiks go to Moscow even though they get dumped on by the Militsiya (police). The Chinese set up International Business Companies in the British Virgin Islands, 'just in case'.

Most of the original low-tax countries – usually small islands – are overcrowded, and have set up economic barriers to new entrants. But more, mid-sized countries come along to soak up demand: Costa Rica, Belize, Ireland, Cyprus, Estonia, Botswana, for instance.

At least in the developed world, that will be the picture for the next half-century. As soon as they are able to, people from the cold, highly-taxed northern countries will move to the warmer, less-taxed countries, and this competition, at least as regards tax rates, will only intensify. It is already very intense for corporation tax, since companies are much more mobile than people. There has been a steady reduction in corporation tax rates worldwide ever since 1975, when they reached their amazing peak of 50% in places such as the UK and the US. Nowadays, 30% is regarded as high. People (and their tax rates) will follow the lead of companies.

Mobile companies and mobile people spell losses for tax collectors, besides complication, itself expensive, and their response so far has been two-fold: on the one hand to be repressive, with anti-avoidance legislation, Controlled Foreign Corporation and Transfer Pricing rules; and on the other hand to be responsive to demand through Double Tax Avoidance Treaties. However, these latter are highly bureaucratic, and may be severely compromised by the OECD's BEPS (Base Erosion and Profit Shifting) initiative.