An earlier version of this paper was presented at the Plenary Session of the Annual Meeting of the German “Verein für Socialpolitik” in Kassel, Germany, September 25, 1996. It will be published in the Conference volume edited by G. Krause-Junk, Tagungsband der Kasseler Tagung des Vereins für Socialpolitik, Beiheft der Zeitschrift für Wirtschafts und Sozialwissenschaften, Dunkere & Humblot, Berlin. The author wishes to thank Liam Ebrill, Roger Gordon, Paul Bernd Spahn, Emil Sunley and Howell Zee for their valuable comments.
The views expressed in this paper are those of the author and not necessarily those of the International Monetary Fund.
See for discussions of these issues, Jacob A. Frenkel, Assaf Razin, and Efraim Sadka, International Taxation in an Integrated World (Cambridge, Mass: MIT Press, 1991); and Vito Tanzi, Taxation in an Integrating World (Washington, D.C.: The Brookings Institution, 1995).
For example, global income taxes were much influenced by Henry Simons’ classic book, Personal Income Taxation (University of Chicago Press) written in 1938. Value-added taxes were influenced by Maurice Lauré’s book written in 1952 and by the subsequent introduction of such a tax in France.
For example, airports are becoming more and more huge shopping centers and major shopping outlets are being created close to tax frontiers.
This kind of competition is also common within federal states such as the United States and Brazil.
It should be noted that the effects of globalization are not symmetric between raising and reducing tax rates. The pressure is normally toward tax rate reduction and thus lower revenue for the countries so affected.
Telecommunication allows increasingly to draw on services from abroad through the internet.
This same kind of competition has become particularly intense within the United States where states compete through tax incentives that tend to reduce the base for the taxes on enterprises. It should be noted that incentives can include outright awarding of grants and/or provision of infrastructure that are not reflected in corporate tax statistics.
There is some evidence from the behavior of affiliates of U.S. multinational corporations that higher profits are reported in countries with the lowest effective tax rates. See U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Direct Investment Abroad, Operations of U.S. Parent Companies and Their Affiliates, Revised 1992 Estimates, Washington, D.C.: U.S. Government Printing Office, June 1995. Of course, much foreign investment goes to countries with valid economic reasons to make the investment.
For example, a modern plane can use millions of parts, many of which made specifically for that plane.
See Martin A. Sullivan, “The Luck of the Irish? Profits and Taxes of U.S. Multinationals Abroad” in Tax Notes, May 20, 1996, pp. 1119-1120; see also Michael P. Devereux and Rachel Griffith, “Taxes and the Location of Production: Evidence from a Panel of U.S. Multinationals,” paper presented at the 52nd Congress of the International Institute of Public Finance, Tel-Aviv, August 26-29, 1996. Table 2 below reports a corporate tax rate of 40 percent for Ireland. However, many industrial corporations are taxed at a rate of 10 percent.
One indicator of this can be seen in the sharp increase in portfolio investment income derived from overseas investments. IMF statistics indicate that for the world as a whole this investment increased from $447 billion in 1988 to $768 billion in 1994. Another indicator of the surge in transnational financial transactions is that cross-border security transactions expanded from less than 10 percent of major industrial countries’ GDP in 1980 to well in excess of 100 percent of GDP in 1992. Source: IMF, World Economic Outlook, May 1995.
For example, tens of billions of US$ of Latin American capital escaped taxation in Latin America by being deposited abroad, especially in the United States, in nonresidents’ accounts which were not taxed by the United States.
See Vito Tanzi, Taxation in an Integrating World, op. cit., pp. 78-89. See also OECD, Tax Information Exchange between OECD Member Countries: A Survey of Current Practices (Paris: 1994).
See Caroline Doggart Tax Havens and Their Uses (London: The Economist Intelligence Unit, 1993) for a description and listing of tax havens. See also Joel Slemrod “Tax Haves, Tax Bargains and Tax Addresses: The Effect of Taxation on the Spatial Allocation of Capital,” in Reforming Capital Income Taxation, edited by Horst Siebert, 23-42, Tubingen: J.C.B. Mohr, 1990).
See in particular Charles T. Plambeck. H. David Rosenbloom and Diane M. Rinz, “Tax Aspects of Derivative Financial Instruments: General Report” in Cahiers de Droit Fiscal International, pp. 653-90 (1996);Julian S. Alworth, “Taxation, Financial Innovation and Integrated Financial Markets: Some Implications for Tax Coordinators in the European Union, Part I; Portfolio Investments,” paper presented at 52nd Congress of the International Institute of Public Finance, Tel Aviv, Israel, August 26-29, 1996; and Myron Scholes and Mark Wolfson, Taxes and Business Strategy (Englewood Cliffs: Prentice Hall, 1992).
It is estimated that daily capital movements exceed one trillion U.S. dollars. Alworth reports that “At end-March 1995 the outstanding national value of over-the-counter contracts [in trading instruments] amounted to a staggering $40,700 billion and at end-December 1996, the notional value of exchange trade contracts were a further $9,200 billion,” op. cit., p. 6. It must be extremely difficult to determine the (taxable) incomes, if any, associated with these movements and to allocate them to specific countries. In most cases these capital movements do not leave any trace in terms of actual movement of money. Only the size of accounts may change. For a discussion of this issue, see Melvyn King, “Tax Systems in the 21st Century,” paper presented at the 50th Congress of the International Fiscal Association, Genera, 5 September 1996.
It should be mentioned that the full effects of tax competition may be felt in changes in the structure of particular taxes rather than in broad changes in the structure of total tax revenue.
The fall in the share of labor income in national income which has characterized some countries (such as Germany) in recent years may be partly responsible for the fall in revenue from personal income taxes in some countries.
Some Canadian provinces have an excise tax on gasoline that increases with the distance from the U.S. border.
However, rate differences may influence the location decisions of pensioners who may choose their residence in low-price (low-tax) countries. It may also influence the location of shopping outlets.
The spread is actually 25 percentage points if one adds the United States to the table. The U.S. does not have a VAT but many states and municipalities levy retail taxes. Because of retail taxes, the rate difference between the United States and Canada is much lower than 7 percentage points.
See also Hans-Werner Sinn, “Tax Harmonization and Tax Competition in Europe,” European Economic Review, Vol. 34, No. 2/3, May 1990, pp. 489-504.
See also Vito Tanzi, Taxation in an Integrating World, op. cit.
Of course, when real capital moves because of tax differences, there is misallocation of resources on a worldwide bases. When only taxable profits move, there may be a reallocation of tax revenue without necessarily a misallocation of real resources.
In a comment on this paper, Roger Gordon has argued that it is likely that corporate income taxes will be replaced by destination-based VATs. However, VAT rates are already high in many countries and trade liberalization will make it progressively more difficult to impose destination-based VATs.
For the reform introduced in Nordic countries, see Peter Birch Sorensen, “From Global Income Tax to the Dual Income Tax: Recent Tax Reforms in the Nordic Countries,” 1, International Tax and Public Finance (May): 57-79. See also Leif Mutén, Peter Sørensen, Kåre P. Hagen and Bernd Genser, Towards a Dual Income Tax? (London: Kluwer Law International, 1996).
The discussion on whether the tax base should be income or consumption has a long history. Hobbes, Mills, Einandi, Kaldor, and Meade all contributed to it. For a recent discussion of some of these issues within the U.S. context see Henry J. Aaron and William G. Gale, editors; Economic Effects of Fundamental Tax Reform (Washington, DC.: Brookings Institution Press, 1996).
See Howell H. Zee, “Taxation and Unemployment,” IMF Working Paper 96/45 (May 1996).
The author has suggested elsewhere that a World Tax Organization may be necessary. See Vito Tanzi, “Does the World Need a World Tax Organization?”, paper presented at the 52nd Congress of the International Institute of Public Finance, Tel-Aviv, August 26-29, 1996. See also Vito Tanzi, “Forces that Shape Tax Policy” in Tax Policy in the XXI Century, edited by Herbert Stein (New York: John Wiley and Sons, 1988).