Not only is the prisoners’ dilemma a well-known example in game theory. It is also a central issue in political negotiations. One of these negotiations that has to be conducted concern corporate taxes.
It was one of our past ministers of finance, Karl Heinz Grasser, who meant that he loves competition and that it was a good idea to compete with other countries by means of reducing the corporate tax rate. The incentive is clear: Lower corporate tax rates attract firms and firms crucially determine economic growth and employment. Business administrators and politicians might think that this indeed is the end of the story and so far it seems to be a reasonable plan.
However, economists know it better. Following the logic from above, any other country has an incentive to lower their corporate tax rates too. Furthermore, if they love competition as much as Karl Heinz Grasser and exhibit the same lack of information, they will continually underbid one another. Economists call this process the race to the bottom.
Theoretically, this race only ends as the public budget is not able to refinance the gifts anymore, which they handed to enterprises in terms of low tax rates or even subsidies. The burden of this policy has to be borne by households.
While this issue alone can already be criticized, it does not even take the instability and the transition costs that have to be avoided into account. So, for just a moment ignore whether the mistakes occurred in Austria or Ireland or elsewhere. Maybe in the short run even abandon the determination and enforcement of the so called efficient corporate tax rate. Just ensure that it is uniform, at least within Europe.