How Globalization Has Affected Tax Policy

How Globalization Has Affected Tax Policy

Globalization has been an increasing trend for businesses looking to expand. By growing into foreign markets, a company expects to increase revenue and earnings to stockholders over the long run. As this has happened, globalization has made taxation more complex than it had already been. Countries developed taxation in attempt to grow domestic economies; however globalization has changed the design of certain taxes and the extent of compliance. Some nations have chosen to raise taxes, while others have lowered tax rates to attract individuals and businesses in an effort to boost the domestic economy. Taxes are put in place to have individuals and corporation paying their fair share, but that is not what is happening in many areas around the world.

The mobility of capital across nations is leading to less revenue through taxation. In The Impact of Globalization on the Characteristics of European Countries’ Tax Systems, Lukovi cites a belief that taxation should be implemented using a multilateral approach instead of a unilateral one. This would certainly help the effectiveness of taxation across foreign borders, but still would not solve all problems. Around the globe, countries are at different stages of development, thus have different ideas on how to implement tax policy for their own good. Due to that reason, it is unrealistic to believe that a unitary tax system could be obtained. If a unitary system were implemented, related companies would be taxed as a single entity and tax havens would be eliminated.

Higher tariffs offer an alternative that is easier to tax and have increasing compliance. In contrast, higher tariffs discourage trading amongst nations in which certain resources are still needed. Consumption taxes, such as sales tax and excise tax, reduce the ability for taxpayers to play tricks in attempt of tax avoidance. “The small open economy is less reliant on taxing profit and income, and more reliant on consumption taxes and taxes on international trade, reflecting the fact that a well-designed tax system based on consumption taxes may create fewer economic distortions than many forms of tax on corporate profit and personal income” (Lukovi 120). When it comes to income tax, in the United States, it can be taken advantage of by making sure to receive income that is taxed at lower alternative rates, like qualified dividends among other financial assets.

Corporations have used numerous techniques to reduce tax liability, one of which is establishing branches in low-tax dominions. The Organization for Economic Cooperation and Development (OECD) is trying to improve the international taxation system. “Another proposal could eliminate a rule that allows companies to have a warehouse in a country without establishing a tax residence there. That could hit, which reports its European profits to tax haven Luxembourg thanks to the warehouse exemption” (Roll Call). This is one of countless examples of corporations, as well as individuals, finding ways to succeed in tax evasion. Individual countries are the ones that need to take action in the end as the OECD does not have enforcement authority.

It is unfathomable how many corporations do not pay taxes. “In the USA between 1996-2000, around two-thirds of transnational corporations (TNCs) paid no tax at all, and over 90% paid below 5% of their total income. From 2005 to 2006, of the 700 largest firms in the UK, 220 paid no UK tax at all” (Strauss). This shows that there are loopholes in many tax systems, and that clever businessmen will find ways to minimize tax liability. Administration for tax policy gets complicated when corporations have a residence in a handful of nations.

Globalization has made the solution to tax policy quite cloudy. Taxes can very much alleviate the effects of poverty. Whatever the best way to set tax policy internationally is, there needs to be increased coordination between territories. This involves communication of information across nations to ensure that potential tax revenue is not lost. A step closer to a unitary tax system will help the effectiveness of taxation as avoidance and evasion would be more difficult to achieve.