Thursday, June 2, 2011

The Impact of Globalization on Taxation

Globalization can be defined as the process of increasing connectivity and uniting the worlds markets and businesses. Globalization has emerged the last couple decades as the internet has emerged, making it easier for people to travel, communicate, and do business internationally. When economies become more connected to other economies, they have increased opportunity but also increased competition. With Globalization evolving, more and more pro globalization and anti globalization lobbies have arisen. The pro globalization party argues that globalization brings about much increased opportunities for almost everyone, where the anti-globalization parties argue that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure.
The Problem we face is that Globalization links the world's major companies together and makes it more of a universal world. This may dramatically impact the majority of populations around the world because of the fact that many of these major companies find loopholes in the system and can hire accountants and lawyers and scheme their way around paying enormous amounts of tax whereas the average person is deprived of fair tax laws and the burden is placed on them to make up for the chunk of loss tax money. Multinational companies are well placed to exploit tax havens and hide true profits thereby avoiding tax. Through offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses worldwide. These corporations use transfer pricing to make up for missing tax money by saying the revenues were utilized in selling a good or service to another company or subsidiary. It's kind of compared to money laundering where criminals open business to say they make revenue through a good or service but in turn they are operating an illegal business but can tell the IRS they have made profit from something legal.
Many people wonder why taxation is so important. For rich countries like the United States, one main reason is that the less tax paid to the government means more for individuals, who are best placed to contribute to the economy. For poor countries it means they can determine their own route out of poverty. It's also the way they can begin to free themselves from dependence on handouts and the punitive conditions attached to aid. Faced with the pressures of Globalization and the threat that companies will relocate unless given lower taxes, governments have responded by engaging in tax competition to attract and retain investment capital. In the US there is little evidence that state and local tax cuts when paid for by reducing public services stimulate economic activity or create jobs. Yet there is evidence that increases in taxes, when used to expand the quantity and quality of public services, can promote economic development and employment growth.
Globalization is thought to reduce the ability of governments to collect taxes. If labor and capital can move between jurisdictions, then attempts to tax these factors will lead to a vanishing taxpayer as factors flee from high to low tax regions. Most economists support globalization because it raises the incomes of peoples worldwide through a one world economy and a competitive business market from the richest to the poorest countries. In other words it creates a one world economy where not just four or five countries rein supreme it creates more balance to try and help the poorer countries prosper. Globalization has been happening for decades. The US government has already surrendered massive amounts of power political and economic power to global organizations such as the United Nations and the World Bank. Our economy has been emerging into a one world economy. If you look inside the United States many of our products sold in our stores are made from the other side of the world. Some people see globalization as sending millions of our jobs overseas and it is destroying the standard of living of America's middle class. In the new global system, multinational corporations can shop for labor almost anywhere they want. So why should they give American workers good wages and good benefits when they can legally pay large numbers of workers on the other side of the globe slave labor wages and get away with it? For blue collar American workers, globalization has turned out to be a very, very bad deal as you can see with Detroit, Pittsburgh and many other manufacturing cities across the United States. Now since they must compete with slave labor in other countries, the labor of these blue collar workers has become greatly devalued. This is having a devastating impact on manufacturing in the United States.
Much of the jobs and industries that have been outsourced have gone to nations such as China. So what is the impact of Globalization on taxation and America? As capital and labor become more mobile and internationally dependent, international tax competition increases. With more jobs being shipped overseas and more and more Americans out of work and taxes increasing, it seems like our country has shifted their focus towards a Wal-mart state of mind. Sustainability is the plan for the our country and as far as tax competition it should bring more companies to poorer nations and leave Americans with fast food chains, Universal Health care and Wal-Mart. Globalization makes it harder for countries to tax at high rates because people and capital will flow out. As labor and capital become more mobile, international tax competition increases. With tax competition individuals and businesses gain the freedom to take advantage of low tax rates abroad. On the other side, Globalization could mean more trading and therefore more jobs created because more and different resources will be available to Americans. This could in turn open all types of new markets for Americans, which would create a new era of jobs for many unemployed Americans. Only the future will tell what the impact of globalization means to tax rates and American business. Until then, it seems sustainability may be the key to reviving a down-spiraling economy.