The Influence of Globalization on Tax Revenue
The Evolution of Business
Gone are the days when businesses were local, and they derived their material resources from relatively close locales, with the labor pool consisted of the nearby residents. Limited mass transportation and slower communication inhibited a fast-paced business environment in those days.
However, over the last century technology increased the pace of business to the point where today's companies secure resources from halfway across the globe in a matter of days, and the once inaccessible human resource now performs duties virtually from the other side of the world. Out of this break-neck speed of business came the birth of globalized commerce, a phenomenon where more transactions occur on a larger, worldwide scale thanks to the help of technology and innovation connecting businesses all over the world.
The Tax Effect
Because certain locations allow for lower costs of doing business, corporations realize more net revenue, which should translate into increased taxable income. However, increased revenue does not necessarily translate into taxable revenue if the organization is maximizing profit by reducing net income tax expense by conducting business where the tax rate is the lowest. When this happens an economic phenomenon called "race to the bottom" occurs (Dreher). Governments reduce tax rates to encourage corporations to locate to their country to do business, thus increasing their economy.
Tax loopholes contribute to a decrease in corporate income tax revenue (McIntyre). Theoretically, these companies should be taxed in both their base country and the target country, which is called double taxation (Lentz). However, double taxation agreements limit double taxation by providing an arrangement where countries do not subject foreign income to double taxation in more than one national taxing jurisdiction. Global taxing agencies enact these agreements to entice companies to do business within their borders to increase their local economy and boost their markets.
There are also other ways to get around taxation. Often a country will enact tax holidays (Lentz) as an incentive for companies to do business within their borders. Tax holidays allow respites from paying taxes during certain times of the year. A "tax haven" (Lentz) is another simpler method of tax manipulation allowing companies to house their revenue in locations where taxes are extremely low and sometimes even non-existent. "It is estimated that the top 500 U.S. companies would owe an estimated $620 billion in U.S. taxes were it not for the more than $2.1 trillion in offshore cash that most of the firms hold in foreign tax havens" (McIntyre).
Countries are businesses as much as the corporations that operate within them. Globalization provides companies the mobility to transact business to different geographic areas with ease. Therefore, countries compete for and attract foreign business by making it cost-effective for corporations to transact business in their country through decreased taxation. When taxable organizations transact their business in locations other than their homeland, they are redirecting tax money that, under non-globalized operations, would be infused directly into the base country's economy. A result of this redirection is that the homeland creates revenues for its government by replacing the burden of lost tax-generated funding on the individual citizens.
Globalization affects individual taxpayers by providing a means for other countries to seduce tax-paying corporations to conduct business with them by reducing their tax expense. Citizens are burdened by increased income taxation to make up the difference of lost corporate tax revenue needed to maintain the well-being of the economy.
As a college student who is getting ready to enter the workforce, having additional individual tax burdens worries me. At a time when our national economy is hurting, many companies are skirting their own nation's tax needs to pay less tax in another country, yet they still generate profits each year. Many individuals argue that a portion of these profits should be going directly into the base nation's economy rather than more tax advantaged countries. Globalization allows the redirection of revenue and therefore redirects the burden of tax revenue on the homeland's citizens, even though they may not be a part of the problem.
Dreher, Axel. "The Influence of Globalization on Taxes and Social Policy: An Empirical Analysis for OECD Countries." Sciencedriect.com. European Journal of Political Economy, 4 Mar. 2004. Web. 17 Nov. 2016.
Kumar, Manmohan S., and Dennis P. Quinn. "Globalization and Corporate Taxation." Www.imf.org. N.p., Aug. 2012. Web.
McIntyre, Robert S., Richard Phillips, and Phineas Baxandall. "Offshore Shell Games." (2015): n. pag. Citizens for Tax Justice, Oct. 2015. Web. 17 Nov. 2016.
Lentz, Lexi. "B&E | Positive and Negative Effects of Globalization on Taxation." IndraStra Global Master. IndraStra Global, 27 Apr. 2016. Web. 01 Nov. 2016.