Globalization is a phenomenon that has been taking place for decades. It is a process through which entities interact with each other across international borders thereby causing integration on a global level (Appel, 2014). The most impressive feature of globalization is that it ensures that the different sections of the world are not isolated from each other. One of the areas that are most affected by globalization is the field of taxation. It has had both positive and negative impacts on the manner in which taxes are remitted amongst other related factors. Therefore, this paper shows that the globalization phenomenon has had a largely negative impact on the field of taxation all over the world.
One of the main impacts of globalization on taxation is that it has led to tax competition amongst various nations. Both foreign and domestic investments play a critical role in generating revenue for the government and enhancing development within a country. Favorable rankings in ease of doing business can help a government to attract investments within its borders. In this regard, it is easy to see why governments would institute measures that encourage people to invest their money in their countries. One of the areas in which the government can exert its direct influence to achieve that goal is in the field of taxation. In the process of making their business environments favorable for investors, governments find themselves engaging in tax competition to attract investment (Cockfield, 2010).
On the same note, tax competition has increased the ease with which investors can move their capital. In the past, the formalities associated with moving one’s capital, such as the tax that was charged on it, made it difficult for an entity to close shop in one country and start afresh in another one. Consequently, one risked running into huge losses if they decided to make such a move. However, the situation is different in contemporary times. Capital and its owners have become increasingly mobile with the passing of time. Unfortunately, the freedom allowed by the lenient measures of taxation makes it easy for entities to avoid taxes legally. For instance, an organization may set up operations in a country where it has a large customer base despite high rates of taxation and locate its headquarters and tax station in another one where it finds the levels of taxation favorable (Cockfield, 2010).
Globalization has also led to an increase in the tax revenues available to the government. As labor gains mobility, it is able to operate from various sections of the world compared to when it is restricted to national boundaries. The same case applies to business entities, which, as earlier mentioned, are likelier to set up shop in areas with low tax rates than those with high ones. As the number of taxable entities within a country increases, the government’s potential to earn revenue from duties does the same (Cockfield, 2010).
Contrary to the aforementioned statements, it is also possible to say that globalization has the potential to reduce the level of taxes available to a government (Cockfield, 2010). Take the case of a country which has an initial corporation tax rate of 30% and decides to reduce it to 25% to attract new investments within its borders. Although doing so can boost the economy in the long term, the said country is likely to make 5% less revenue from taxes for the next few years or even decades with all the other factors being held constant compared to keeping the original rate as it is.
On the same note, the reduction of taxes has a directly proportional relationship with government spending. In this regard, reduced tax revenues constrain the national budget. Thus, it would not inject as many resources into recurrent, development, and welfare expenditure as it would have liked. In turn, this reduces the general public’s earnings and expenditure. In turn, the number of taxable individuals and entities also goes down due to the effects of a depressed economy. In other words, globalization bears the potential to give rise to a cycle of reduced government earnings from taxation (Cockfield, 2010).
Moreover, globalization tends to increase the tax burden on labor as opposed to capital. In an ideal situation, both capital and labor would be perfectly mobile. However, in reality, capital tends to be more flexible than labor. This is because governments all around the world put restrictions on the movement of people, such as immigration quotas, but never do they put a limit to the level of resources that they allow investors to inject into their economies. Given that an investor can pack up and leave for another country at will, it becomes necessary for governments to tread carefully when dealing with capital matters. The ever-increasing mobility of capital prompts the government to reduce the taxes it levies on it. Failure to do so may leave it in the precarious position of having to witness capital flight. Unfortunately, easing taxation on capital may also make it unable to meet its targeted revenue objectives. Therefore, just like any sensible entity would do, the government shifts the burden of taxation to the immobile factor of production, which is labor (Cockfield, 2010). This is because somebody has to fill the void left by the reduced taxes levied on corporations, and unlike capital, labor usually comes in no short supply. Even if people could easily leave the country, the government is unlikely to have a shortage of workers to tax. Another way to look at it is that governments attempt to limit the mobility of labor intentionally by increasing the tax burden that it places on it. Take the case of a country that is experiencing unprecedented immigration with people traveling there to gain meaningful employment. The government can increase its tax rate on foreign workers, which then deters them from seeking entry into the country. All in all, it becomes clears that globalization has the tendency to increase the tax burden that the government puts on labor as the least mobile factor of production.
The globalization phenomenon has also led to a change in governments’ approach to the utilization of taxes. Under normal circumstances, the government is mandated to serve the best interests of its citizens. This involves the provision of utilities and other related services. However, following the advent of globalization, governments have found it increasingly difficult to find a balance between meeting the demands of their citizens and complying with those of the investors. For example, a corporation may decide to invest in a given country on condition that the government improves the infrastructure of its area of operations in terms of say, power and road connectivity. Unfortunately, governments usually have a limited amount of resources to spend at a time. The government may decide to postpone the construction of a road leading to a residential area and immediately construct one leading to the factory’s location. In the end, globalization leads to a situation where the utilization of tax revenues is directed toward the needs of investors which now take precedence over those of ordinary members of the society (Cockfield, 2010).
Just as globalization allows the legal avoidance of taxes to prevail across international borders, it also promotes a culture of tax evasion by mischievous individuals. There are numerous entities that engage in fraudulent activities in every economy. For such people, remitting taxes to the government increases their risk of getting identified by the relevant authorities. Consequently, they prefer to operate under the table by evading taxes. In this regard, the fraud cases amount to tax evasion meaning globalization has played a significant role in fuelling the trend (Palan, Chavagneux, & Murphy, 2013). A person who realizes that the government is coming after them for tax fraud simply packs up and leaves for another country where they can hide or seek immunity. Globalization has also led to the emergence of numerous tax havens across the world where people can hide their loot from the authorities. That coupled with the flexibility allowed by globalization for people to engage in money laundering has led to an increase in the cases of tax evasion.
Another impact of globalization on taxation is that it gradually erodes the sovereignty of a government and nation as a whole to determine its tax policy. Such countries have to take the interests of investors into consideration when formulating tax policies. This is because the government is in constant competition with other nations to create the most conducive environment for businesses to carry out operations. Trade and labor unions are not left behind when it comes to taxation. Although the government may want to compensate for shortages arising from the leniency that it extends to investors, trade unions cannot allow the oppression of their members for the government to meet that objective. Consequently, even though the government has a final say on matters of taxation, unions can influence its will through civil disobedience and negotiations. Apart from that, in contemporary times, almost every government in the world is signing accords with other countries to facilitate the establishment of free trade areas. This will allow commodities originating from within its borders to gain entry into external markets on favorable terms on condition that it allows those from the same countries to access its markets too. One of the central issues that are taken into consideration when formulating free trade arrangements is taxation. The deeper the government gets into such agreements, the less control it maintains over its financial policies. In the end, globalization tends to reduce the autonomy that a nation enjoys when it comes to determining various components of its tax policy (Cockfield, 2010).
Most surprisingly, globalization has led to a shift in tax revenues from the traditional economic powerhouses to emerging economies. While the United States still remains the country to watch financially, Asian economies, such as China, are slowly eating up the proportion of taxes that it used to obtain. This is because companies are increasingly outsourcing their production to areas where they are charged fewer taxes. Take the case of Nike, an American sportswear company. It has outsourced some of its production to Taiwan where it can procure labor at cheaper rates than it does within the United States. Just like it would in the United States, it still has to pay taxes to the Taiwanese government for doing business in its precincts. This is money that would have gone to the United States government had Nike maintained operations within the country. It is important to keep in mind that apart from Nike, there are thousands of other American companies outsourcing their production outside the United States thereby denying the government tax revenues (Palan, Chavagneux, & Murphy, 2013).
The globalization phenomenon has had a largely negative impact on the field of taxation all over the world. Although there are some positive impacts of globalization on taxation, such as reducing it to accommodate new investments, its disadvantages far outweigh its advantages. For instance, it reduces the government’s autonomy over the country’s tax policy. Moreover, it leads governments to give investors’ needs precedence over those of average citizens. It also reduces the level of tax revenues available to the government. Apart from that, it encourages the practices of legal avoidance of taxes as well as the illegal evasion of taxes through the use of tax havens. Most dishearteningly, globalization has prompted governments to shift the burden of taxation from corporations to labor which is viewed as the less mobile factor of production. The increasing influence of globalization on taxation policies also has the potential to give rise to a cycle of reduced tax earnings for governments.
Appel, H., 2014. Tax politics in Eastern Europe globalization, regional integration, and the democratic compromise. Ann Arbor, MI: University of Michigan Press.
Cockfield, A.J., 2010. Globalization and its tax discontents: tax policy and international investments. Toronto, ON: University of Toronto Press.
Palan, R., Chavagneux, C. & Murphy, R., 2013. Tax havens how globalization really works. Ithaca, NY: Cornell University Press.