What makes the states of Delaware and Nevada so special? According to business owners, the answer to that question is a no-brainer: Delaware and Nevada are industry-friendly tax havens, or at least have been in the past (Nevada recently went Blue). It’s just cheaper and easier to do business there than it is in more regulation-heavy states like California and New York. That’s why so many companies choose to incorporate and do business in one of those two states.
But let’s imagine a situation in which California and New York get really sick and tired of seeing all the business go to NV and DE, so they decide to take some serious measures. They slash corporate taxes, reduce the state minimum wage, and pretty much eliminate any and all corporate regulations. When this happens, when a state or nation goes overboard relaxing their laws and regulations to attract economic activity, it’s called a “race to the bottom.” Why the bottom? Because if every state deregulated and cut taxes and wages in an effort to outdo other states, eventually we’d theoretically arrive at the “bottom”: an economic landscape with no taxes, no regulations, no environmental restrictions, super-low employee wages, no benefit plans or insurance, and minimal attention paid to the actual quality of the goods or services being produced. And that would be...bad.
Of course, we’re unlikely to see a true race to the bottom happen here in the United States. Federal regulations, civil rights groups, and general citizen sentiment would probably never let it get that far. But in other developing nations that lack a strong legal infrastructure or civil rights mentality, it’s not outside the realm of possibility that a race to the bottom could take place. BTW, it’s important to note that deregulation and tax reductions are not necessarily bad things. In fact, they can be great for economic stimulation. When we use the phrase “race to the bottom,” though, we’re specifically referring to situations in which economic competition has resulted in unreasonable and/or unethical economic decisions.
