EFFECTS OF GLOBALIZATION ON TAX SYSTEMS

EFFECTS OF GLOBALIZATION ON TAX SYSTEMS

Introduction

There is no doubt that the rising trend of globalization has affected various states on its capacity to collect taxes. The effect has led to several proposals among states on the need to establish a global tax system to help states that are crippling down with the reduced amounts they collect in the form of taxes, which has also affected redistribution activities. The increased rate of globalization has led to the development of various forms of cosmopolitanism, internationalism, transnational and supranational with all pointing on the increased power and influence gained within regions transcending to global areas. Tax systems are therefore affected by every development which eases transactions in the international stage, making them restructure and such affect the capacity to collect taxes from multinational entities. Organizations and individuals are seeking various avenues on how to evade paying taxes or paying the minimum amount of taxes possible therefore trying to operate in states that offer such kinds of cut tax rates as well as favorable tax systems. The need for a tax cut and evasion of tax has led to the development of two significant features that affect the capacity of a state to collect taxes; tax havens, and the tax competition. Tax havens make taxes out of reach for its citizens, storing money in such regions reducing their collection capacity. On the other hand, tax competition has significantly led to the cutting down of taxes to attract various forms of investments, forcing states to forgo some tax bases and reduce their tax rates to maintain the competition affecting tax systems. The paper, therefore, discusses how globalization is affecting the capacity of states to collect taxes and the possible solutions to such problems.

Globalization effects on capacity to collect taxes and distribute resources.

Globalization has been a trend in the operations of activities in recent years. Globalization has led to the recent cataclysmic and dynamic changes in operations of organizations and individual employment, where trading activities have become easier internationally without many bureaucracies. At the same time, through globalization, most brands have managed to operate globally and cement their place among various countries of interest hence gaining the international image of a brand. There is no known conventional definition of globalization as different scholars and researchers have a different definition for globalization. However, the different meanings point that globalization refers to the ability or process by which most activities are gaining a global influence, which aids in international trade. Through globalization, people are able to conduct their activities easily across state and national borders, causing an effect of people transacting easily. Globalization is fast developing and improving at a faster rate with an improvement of technology, which has enhanced its activities. The activities have therefore led to various effects on the capacity of tax collection and effects in various states.

The issue of globalization affects the capacity to collect tax has brought debates among economists and tax collectors on how the phenomenon influences revenue collection and redistribution to various areas of need. Some economists are torn on whether to be for pro-globalization or anti-globalization, calling for international justice on the tax systems and the global taxation effect. Taxation needs to finance the country, especially in the allocation and distribution of public goods. Therefore, it is no doubt that states need money to sustain themselves and enhance economic development without any strain in national resource collection and distribution. The states are therefore focusing on the various state tax bases that are taxed and revenue collected from them.

The most common tax bases are those of capital tax, income tax, sales tax, and labor tax. However, globalization is affecting the capacities of such tax bases to be mobile and transcend beyond national borders, and in so doing, the states having the restricted capacity to tax them. Such restrictions affect the tax collection systems, with some effects being felt among the remaining individuals. For instance, mobile tax bases such as capital investment may be attracted by other states as a result of tax competition and thus migrating from the member state to the newly provided and promoted reduced tax cut. The incident of the burden is therefore left to the hands of the remaining individuals, affecting their normal tax activities. To avoid such mobility in tax bases, nations are forced with the harsh reality to reduce the tax rates to favor mobile tax bases in order to stay within the country and thus affecting the levels of national revenue collection through the process of taxation to match the fiscal state of activities. Globalization has led to many tax avenues to be zero when it comes to regional trading blocs operations. For instance, there is the removal of tariffs which has been a source of income through taxation of imports in the form of import duties to goods that are coming into the country and thereby causing a challenge to most nations reducing their capacity to collect taxes in such an area (Tsubuku, 2018). Thus, such effects of globalization are giving states options on how to deal with such a situation.  The fiscal needs of states are determined by the size of the states and the amount of budget needed. The nation’s size would therefore explain how such affects the tax collection as larger states are suffering more as compared to smaller states. The effect is seen to be influenced more by the existence of tax competition.

Tax Competition

Tax competition is a phenomenon that has increased with the recent increase in globalization activities and such is affecting states and their capacity to collect taxes. Problems have increased with regards to tax collection and resource distribution with the onset of the competition, which is suffocating a number of state economies. The phenomenon is one of the major effects that have led to problems associated with tax collection among globalized countries involved in exchange activities. Tax competition may refer to the situation whereby countries compete against each other in attracting foreign investments giving an assurance of low tax rates as some countries even volunteering to become tax havens (Genschel and Schwarz, 2011).

Tax competition offers tax bases the opportunity to be mobile and move from one region to another and this has been influenced by increased global activities. The world has now become a global village as states are interconnected in different ways through technology and increased internet activities. The increased interconnection is thereby allowing private entities and corporations to invest anywhere that they would like to invest in, with regards to favorable conditions in such countries such as a lower tax rate and fiscal policies that favor them. Thus, countries focused on increasing investments in their states use the technique of reduced taxation to attract foreign investments.

Tax competition majorly targets capital investments, which is also a major source of tax in various states. In addition, tax competition always points to corporation tax but can also extend to other aspects such as income and labor taxes. Tax competition has thereby become significantly important in recent years as various multinationals can set bases in various countries as they are assured of paying less in corporation taxes. The competition is often influenced by various factors that countries put into consideration. Countries may see the need for competition with various aims. Such aims may include the creation of employment opportunities to its nationals, increase in investments at the same time with more investments occurring within the countries. The end result would be an increase in tax bases as they would tax incomes created from jobs, the attracted investments and other activities. Tax competition has, therefore, led to various federal and state governments to modify their tax systems and usually the modification leads to the idea of reducing tax rates and revenues.

Competition may have various negative effects on an economy and the fiscal policies of a country, especially if a country decides to retaliate by also cutting down their taxes. Retaliatory acts may usually lead to temporary measures, which in the long run may prove to be uneconomical, making states suffer, reducing the capacity to collect taxes. Countries also experience difficulties in the distribution of the tax burden as a reduction in corporation taxes may result in balancing measures (Rixen, 2011). Such measures may include increasing income taxes and labor taxes, which in the end would cause an imbalance in revenue collection, affecting the country negatively. The taxing may become heavier on the labor taxes and thus may further lead to the development of mobile labor as labor may move in search of areas with less taxation and thus the development of revenue deficits as a result of tax collection (Genschel and Seelkopf, 2016).

Countries are forced to develop legislation that is favorable to their own investment capital to ensure that such mobile investments remain within the state. Such legislations are unfavorable to the country and thus leading to several restructuring of the collected revenue. Policy changes are in the increase in how to collect and distribute the resources. The external competition pressures are thereby causing strains in a country’s revenue system and thus leading to various resource distribution challenges. Moreover, it is worth noting that the level of competition shifts tax attention to other bases that are less immobile yet have fewer amounts of revenue turnover, making it hard for the organizations to sustain such kinds of distribution of public goods. The mobile tax bases have forced most governments to run on a deficit as governments are struggling to use the fewer revenue collected from the mobile bases (Carnahan, 2015). Hence, it struggles to balance the revenue streams and allocations due to reduced revenue from mobile bases such the corporate profits and the proceeds from the income taxes. Tax competition has harbored the tendency of corporations and rich individuals to move from one country to another to save their billions.

Transnational Cooperation Effects

Private corporations and multinational organizations are taking advantage of the current situation of increased globalization to avoid high tax pay in parent states. As they cross borders, such corporates find avenues on how to avoid tax paying and, in the end resulting in the state losing considerable amounts of corporate and income taxes, reducing the amounts of revenue collected. Moreover, such corporations may now tend to act as though they are a nation themselves, and the tax systems may not reach them. States are now forced to share taxes with other states as a result of migration of entities to foreign lands. It is worth noting that rich individuals are also revoking their member citizenship to other countries that have a favorable tax policy in a bid to save their billions that would otherwise be highly taxed and taxed. Such acts affect the operations of states as they may not have the idea on how to collect the taxes and thus may transfer the burden to the low-income earners and the poor in the country. Such transfer may see the levels of tax increase among the poor despite the revenues being low and difficult to distribute in every sector of the economy and thus leading to the under-development and poor economic growth of the country (Pogge, 2011).

Thus, justice needs to be promoted to ensure that the affected countries are able to gain access to such foreign investments to ensure there is a balance in their capacity to collect tax without the need to restructure the existing tax policies. Further, corporates, especially for-profit organizations, are concerned with making profits with fewer costs incurred. The organizations grab up the investment chances provided to ensure more net profit in areas offering favorable tax policies. In the end, the original state suffers the most as they try to fill the gap left by the mobile capital investment that has migrated to other world regions. Justice, therefore, needs to be done to these states to prevent their economies from crippling, hence the call for a unified global tax system to increase or maintain state capacity for tax collection. However, with the calls for justice, more problems of tax evasion are arising. There is the development of tax havens, which further affect nations and states.

Tax Havens

Tax havens refer to countries where tax rates are at lowest, and thus the tax evaders including multinational companies may like to set headquarters in such countries and avoid parent countries which they view as highly taxing, having the intention to pay little or no tax at all (Gravelle, 2010). A significant amount of gross domestic products (GDP) of various states are observed to be held in offshore accounts in tax havens, avoiding taxation. It is also observed that most profits are transferred to areas that assure possible tax avoidance and may not be within a tax jurisdiction. Some policies, for example, transfer pricing has reduced transparency in tax collection, and this has aided in the numerous number of tax evasion that has been observed in different countries (Murphy and Christensen, 2012). Such has become expensive to most states as they do not have the idea on how to access the foreign accounts of tax evaders due to some international laws regarding the sovereignty of member states. Tax havens are a product of globalization since with globalization in place, individuals are able to communicate with offshore countries and use various expertise such as foreign accountants in avoiding taxation. Such tricks that are applied include the problems of price fixation. Governments are finding it hard to solve price fixation as corporates determined to engage in tax avoidance and tax evasion are making it even harder. Nobody loves or likes to pay taxes and thus will come up with various means to evade the high national taxes, even if it means storing of their income and profits in foreign agencies. However, governments are adjusting by removing the fiscal barriers which would improve fiscal and economic integration.

Most developing countries are in constant competition to try and attract a large number of foreign investments with different motives. The countries offer tax breaks that seem attractive and developing of tax havens that are making it difficult for large economies to determine their fiscal needs and sizes. Developing countries have been associated more with the problem of being tax havens and this has affected operations of countries with a decline in amounts of tax collected with the prevailing reduced capacity to gain access to the tax. Countries are losing money in terms of billions with the existence of tax havens and avoidance. For example, in Angola between 1977 and 2002, billions of dollars were unaccounted for as a result of oil sales, with the proceeds being stored in offshore states acting as tax havens. It became difficult for the country to determine where the oil prices really went as international oil companies could not give details on how much they paid for the Angolan oil. The loss in such a revenue base affected the economy the reasons as to why the country is currently languishing with high poverty rates and disparity in revenue allocations.

Solutions

With globalization in place and offering a wide range of effects on state capacity to collect taxes and redistribute resources, various solutions can be drawn. Such solutions would ensure tax justice among countries that are affected by the increased rate of tax competition, tax evasion, and tax havens to maintain their tax collection capacity and improved efficiency in tax collection. Moreover, this would improve the functions of resource distribution among governments. Such solutions may include;

1. Unitary taxation among multinationals as this would reduce the problem of moving taxes to regions with lower tax systems. Such unity would therefore ensure that taxes are made promptly and on time.
2. The states should harmonize tax rates that will therefore be favorable in different global markets, enhancing tax collection.

• States should cooperate with each other to reduce the various effects of globalization on tax collection capacity. The corporation would reduce the rate of tax competition, thereby avoiding unnecessary pressures on the existing tax policies. Nations need to share information with each other regarding the economic activities conducted by their rich individual citizens and entities. The disclosure would, therefore, enhance the countries to effect tax appropriately. Moreover,

1. There should also be established regional and global tax systems that would cater to the needs of citizens and their interest to cater to the tax burden that would be transferred to them as a result of tax mobility.
2. Governments should encourage state by state reporting to enhance the transparency in activity transactions to reduce the rate of tax evasion (Ronzoni, 2014). Corporations, therefore, would ensure that each activity conducted in each country, thereby, authorities in each state are able to know what happens in their country and engage in the relevant tax process.
3. Making of willful money laundering a punishable crime would also facilitate transparency in the transfer of money to foreign banks. Such would reduce the rates of tax evasion and misappropriation of figures through price transfers and hence leading to proper procedures that ensure taxes are collected accordingly.

Conclusion

Globalization can be seen to have taken effect in the world today and has made the world a global village. The influence of globalization has affected various sectors, such as the taxation systems, especially global taxation. Globalization affects various tax bases and has led to the transfer of some tax burdens from one tax base to another. States working together as a trading bloc are forced to reduce duties and remove tariffs on their borders to enhance free trade. Free trade, therefore, would mean zero collection of taxable revenue from such goods traded on. Globalization has also led to the development of tax havens where individuals and corporations with the malicious intent of not paying taxes find a loophole to store their money and conduct activities. Moreover, the development of tax competition among different countries to attract either investment capital or labor tax has led to significant changes in state tax systems. The changes are a burden, and thus such burden makes it difficult in income distribution, affecting other taxable sectors of the economy. However, various solutions may be arrived at in correcting globalization effect on the tax system and thus resulting in future efficiencies in tax collections and improvements.

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