Globalization raises fundamental issues regarding the financing of state activities. Capital, goods and people move across national borders. Many companies too can shift production sites, patents and jobs abroad.
In such an environment, can national taxation policies still bring in enough revenues to finance public budgets? Can politics still distribute tax burdens between capital and labor, between rich and poor?
Experiences with globalization up to now show that it is still possible to finance state activities. But the distribution of tax burdens is shifting in the direction of less mobile tax bases, even if that is changing quite slowly.
There are often calls for globalizing taxation — or shifting decisions about tax policy to the international level.
And there is no evidence that state revenues are eroding.
The share of gross domestic product taken by public revenues between 1965 and 1995 rose from 25 percent to 34 percent on average in member countries of the Organisation for Economic Co-operation and Development. Since 1995, it has remained more or less constant.
In Germany, the rate of taxation and social insurance contributions is higher than the OECD average. In the 1970s, it reached about 36 percent. In the 40 years since, it has remained astoundingly stable in spite of occasional vacillations.
One could argue that the expansion of tax revenues in the 1960s and 1970s might have continued in the 1980s, if it weren’t for globalization. That would mean that globalization caused a reduction in tax revenues.
One can only speculate here, because there is no convincing evidence available. In countries that are highly exposed to globalization, for example, public revenues aren’t seen to be less than elsewhere.
But shifts have occurred with the structure of the tax system and the distribution of the tax burden.
One important aspect of globalization that directly impacts public budgets is a reduction in tariffs. In 1965, customs duties constituted 7.1 percent of public revenues. The OECD average today is a paltry 0.5 percent.
The influence of globalization is also clear with assets-related taxes, including net-assets taxes, as well as property taxes or inheritance taxes.
Physical terrain can’t be outsourced, so property taxes are an attractive source of income for states facing international tax competition.
Taxes on mobile assets, on the other hand, can induce capital or asset owners to move to another country.
So it’s not surprising that, except for property taxes, taxes on assets are declining internationally. They never had particularly great importance but in 1965 these taxes made up some 4 percent of overall tax revenues. In 2014, the figure was only 2 percent.
Property taxes have experienced a more stable development but have likewise risen more slowly than tax revenues overall.
So, how do governments compensate for reductions in customs duties and assets taxes?
Taxes and fees on tax assessment bases that are less mobile are playing an increasingly bigger role.
On one hand, there is consumption: In almost all OECD states where it exists, the value-added tax has acquired more weight in recent decades.
On the other hand, the burden imposed on working income has risen. The biggest increase is in the area of social insurance contributions. In 1965, their share of state revenues was 18 percent on the OECD average. Today it is 26 percent.
The heavier burden is primarily a consequence of the expansion of the social state. In contrast to other taxes, social insurance contributions are linked as a rule to a calculable service in the form of pension payments or health provisions.
With its export-oriented economy, Germany has a special interest in preventing global economic activity from being reduced through double taxation.
Nevertheless, many employees try to avoid making payments. But that’s not easy. In spite of the increasing movement of labor, emigration is not an option for most workers. This has certainly helped to increase the burden on those who stay.
The debate over tax policy and globalization focuses on corporate taxation. Countries compete more and more with regard to mobile investments.
When companies decide to make an investment, taxes are only one factor among many. Political stability, a dependable system of law, the educational level of the population, the geographical location of a country and the size of the sales market are of fundamental importance.
Apart from taxation, governments seeking to attract investors can influence these factors only gradually. But they can alter taxes – thus making them powerful cards in the game to attract foreign investment.
In recent decades, tax rates on corporate earnings have been declining. In 1983 the OECD average was still 46 percent; by 2016 it had fallen to 25 percent.
Germany could not resist the trend and over the same period reduced the burden on companies from almost 63 percent to 31 percent.
It is interesting that sliding tax rates on corporate earnings don’t go hand in hand with lower tax revenues. In the 1960s, the share of taxes on corporate earnings in relation to overall tax revenues was a good 8 percent throughout the OECD; the level is similar today.
There are various reasons for this. Above all, even though many countries lowered tax rates, the assessment basis was expanded: Depreciation possibilities were reduced, loss offsetting was limited. An investment location doesn’t become more attractive if the advantages of a low rate of taxation are neutralized by a broader assessment basis.
But a low tax rate helps in another form of taxation competition: Companies have reason to shape their financial structures in such a way as to declare their earnings in countries with low tax rates. So a low tax rate is advantageous in competing regarding taxation.
Further reasons for stable tax yields have to do with rising corporate profits and the shift of income from the area of personal income tax to corporate taxation, in order to benefit from the drop in tax rates.
There is a further factor that stabilizes corporate taxes. It is true that governments want to attract investments and create jobs. At the same time, however, they seek to tax in their own country as large a share as possible of the global earnings of multinational companies.
In the future, many countries will attempt to impose higher taxes on companies that have customers within their borders, but few production facilities or employees. In such cases, the respective countries have little reason to fear losing investments and jobs through higher taxation.
For example, the European Union is currently attempting to force companies of the digital industry to pay higher taxes in Europe.
Apple recently was ordered to pay €13 billion in back taxes in Ireland.
The European Commission claims that Ireland offered Apple tax advantages that distort competition in the European single market. In fact, the aim is not so much to protect competition as to collect taxes and attack U.S. supremacy in the digital economy. The U.S. Treasury reacted by threatening to increase taxation on European companies in the United States.
So competition between countries can drive up taxes. Many internationally active companies fear that the access of various countries to their revenues could lead to double taxation.
All this means that globalization subjects corporate taxation to increasing competition. But there are factors that work against the erosion of corporate taxation.
In response to the globalization of the economy, there are often calls for globalizing taxation — or shifting decisions about tax policy to the international level. But this frequently fails because of the divergent interests of individual countries.
One example is the demand that a minimum tax rate be introduced on corporate earnings. Countries disadvantaged by a marginal geographical location or a low state of development especially need tax policy as an instrument of economic policy. A minimum tax rate on corporate earnings would significantly reduce their chances of opposing countries like Germany in location competition.
There are also conflicts in the endeavor to counter tax avoidance by multinational companies.
Progress has admittedly been made with regard to the OECD initiative on base erosion and profit shifting: In the future, companies are supposed to be taxed where their value creation is located. But this is a typical compromise formula. There is no agreement about how this taxation can be achieved.
What are the consequences for German tax policy?
Demands for more distribution through net-assets taxation or higher corporate taxes can be self-destructive in an open economy like Germany’s. It drives capital and asset owners abroad. Among assets-related taxes, only property taxes offer some wiggle room.
With its export-oriented economy, Germany has a special interest in preventing global economic activity from being reduced through double taxation or reintroduction of tariffs.
Moreover, Germany must accept that tax authorities in the export markets of its companies intend to use taxation to take a larger share of the earnings of these companies. Here the aim should be to defend German taxation rights.
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