Listening to the bureaucrats at the Organization for Economic Cooperation and Development and in other transnational organizations like the European Union, it appears that the most pressing issues about globalization is the impact upon governments’ ability to collect taxes. Of course, these international civil servants incomes depend upon tax revenues raised by member countries. Their anguish is focused upon an expected round of so-called tax competition where countries engage in a competitive process of internecine tax reductions in order to attract wayward capital.
In posing the problem this way, it is obvious that they correctly see that the primary agent and effect of expanding global markets is the increased mobility of resources, especially capital.
However, there is a false presumption that such competition will involve a mutually destructive “race to the bottom” where governments and citizens alike are helpless before the might of global capital. The most likely result of competition among governments is that they will be forced to become more efficient providers of a better mix of publicly-funded goods and services. Faced with the prospects of having to downsize themselves, it is no wonder that bureaucrats are squealing like stuck pigs.
But what would be so wrong about drastic cuts in taxes? Families in countries burdened by the welfare state will find advantages from tax competition. While many women eagerly joined the labor force to pursue careers, rising taxes in the post-World War II period meant that households must have more than one income earner.
In the end, labor and owners of other less mobile resources are least able to avoid the burdens of taxes. For example, residents of remote, nonurban areas are disadvantaged by high levies on gasoline. At the same time restrictions on dismissals will mean that companies are more likely to locate in urban areas where they can hire part-time workers.
Amid such hysterical outbursts, owners of footloose capital are often portrayed to be feckless patriots or evil conspirators. Instead, the real traitors to national patrimony are incompetent bureaucrats and politicians who do not understand the consequence of their own actions in pushing capital offshore. Businesses usually move only after there is a significant change in the treatment of their income earned from one of their areas of competence. (And high-income individuals are usually driven away when tax rates become punitive.)
When it comes to capital flows, the push factor is likely to be more important than the pull of low taxes. On their own, low tax rates are no more attractive than are cheap wages. Both of these are definitely important considerations that capital owners weigh, but they are but a few among a constellation of many others. Just as important is the reliability and transparency of the regulatory environment as well whether the courts in the jurisdiction are guided by the rule of law. Were cheap wages or low taxes the deciding factors, capital would be flooding into much of Africa and parts of the Middle East. Instead, more interest is shown in offshore locales like Bermuda, Ireland, Switzerland or Hong Kong where governments work hard so their countries are more attractive to quicksilver capital. In so doing, there are few visible sacrifices in the amenities of life available to their respective citizens.
Suggestions that capital movements as a method to avoid taxes are the acts of an exclusive and exploitative class of capitalists seem to be derived from a logic emanating from a Marxian time warp. Unlike at the beginning of the Industrial Revolution, owners of capital are just as likely to be workers. And their interests as worker-capitalists are best served when their pension or mutual fund managers put their assets to work where they generate the highest net yield.
If the discussion is truly to consider taxation from a global perspective, it should be noted that a small number of the very rich already pay the lion’s share of taxes in emerging as well as developed economies. This is true despite their best efforts to avoid taxes by hiring accountants who aid them in taxing advantage of loopholes or deductions.
Meanwhile, skilled workers can be as mobile as is capital, especially those in the information industry who can be virtually mobile in plying their trade over the Internet. At the same time, it will become even less important that skilled workers or those employed in bricks-and-mortar industries are geographically immobile as long as their capital is. Global capital flows aided by the Internet revolution will actually democratize access to tax havens that were once the exclusive domain of the very rich and the well connected.
A dominant concern among more humanitarian critics of globalization is the threat to the ability of governments to provide social safety nets. Yet this too is exaggerated. Public provision of social security assistance could become less important if governments remove policies that inhibit innovation and restrain economic growth. Restraints on competition or rigidities in labor markets create rigidities in markets and are caused by imprudent government mandates. Greater prudence in policy making can remove the basis of many economic maladies that lead to a demand for social security.
There will be costs, as there are in the wake of any major economic and social transformation like that of globalization. And these costs will motivate resistance to this change. However, motives of naysayers should be examined to see if they are protecting some clique of special interests or truly taking the best interests of the global community to heart.
Discussions of the impact of globalization must be made in a dynamic context so that the prospects of net benefits likely to accrue to most actors in most economies can be seen. After all, international capital movements lifted more people out of poverty and improved global well being better than all the well-intentioned aid given over the past three decades.
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