Globalization and taxation

Abstract

Pre-globalization tax systems were devised in an environment where international trade was restricted by tariffs and transportation costs, and capital nlovements were nearly nonexistent. Now that these restrictions are reduced, taxation can have spillover effects that cross national borders. This has increased the power that tax rates have over the conduct of international economic activity, which could cause some potential problems such as the loss of government tax revenue and the distortion of investment location decisions. The goal of this study is to provide an introduction to this new issue in international public finance and a summary of the debate surrounding it. This study outlines evidence that shows that multinational firms routinely use tax avoidance to reduce their global tax burdens. The study then provides an introduction to the debate on whether or not tax competition is good or bad. In conclusion the study provides an econometric analysis of the relationship between tax rates and international flows of U.S. investment, and finds that tax rates have no statistically significant impact on the location of U.S. PPE investment and a declining influence on U.S. FDI investment. .. TABLE OF CONTENTS I. An Introduction To Globalization And International Capital Taxation. p.l II. The Problem Of Revenue Loss. p.7 III. The Arguments For And Against Tax Competition. p.ll IV. An Empirical Study On The Effects Of Tax Rates On Investment Location Decisions. p. 30 V. Conclusion. p.48 I: AN INTRODUCTION TO GLOBALIZATION AND INTERNATIONAL CAPITAL TAXATION The past few decades have seen rapid technological advancements in areas such as computers, communication, and transportation. These advancements have allowed an unprecedented level of high-speed global communication and transportation that have transformed the global economy. This is a transformation from a global economy divided by national borders to a new global economy, which increasingly behaves as a single world market. In this transformation national borders are slowly losing their relevance, and nations are becoming increasingly interdependent. Now government policies, which once had no effect on the global economy, can have a global impact. One such policy area is the taxation of capital income. Tax systems were previously devised in an environment where international trade was restricted by tariffs and transportation costs, and capital movements were nearly non-existent. Now that these restrictions are reduced, taxation can have spillover effects that cross national borders. This has increased the power that tax rates have over the conduct of international economic activity, which could cause some potential problems such as the loss of government tax revenue and the distortion of investment location decisions. The goal of this study is to provide an introduction to this new issue in international public finance and a summary of the debate surrounding it. 1. THE FORCES OF GLOBALIZATION Globalization itself is not so much an inevitable economic force as it is a combination of changes in government policy and new technologies made available since the end of World War Two. Inlmediately following the war, an international framework