B&E | The Impacts of Globalization on Taxation
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B&E | The Impacts of Globalization on Taxation

By Chris Schmied

B&E| The Impacts of Globalization on Taxation

Image Attribute: stevepb / Pixabay, Creative Commons

Over the years, countries have started to become more dependent on other countries due to globalization. Globalization can be defined as the process of connecting and uniting the world markets and corporations. With trading now crossing borders comes the ability for companies to move into different parts of the world and become multinational corporations. Since all of the tax laws aren't the same around the world, this opens up possible loopholes for companies to move their money around in order to not pay the taxes they would normally have to. These types of actions from companies are greatly harming the country that they are doing the majority of their business in because that country isn't receiving the revenue that they are owed.
With the varying tax policies, different governments implement, companies are able to move their labor and capital from a high tax to low tax region of the world. These different tax policies are creating competition between countries because each region wants the revenue created from these businesses running operations. The only way governments can compete with each other are to offer tax breaks or to lower the tax rates. This can cause problems for the government because with these breaks on the taxes, they would be receiving less revenue than they would have been able to. With less revenue being collected it takes away from the government being able to offer services to the public and could potentially eliminate the welfare state. This problem would affect both rich and poor nations. This competition between regions is causing problems for the region attracting business and the region losing the business. The region that will gain the new business is allowing them to run their operations with lower taxes than they could be collecting, which could potentially harm them in the long run. The positive is that they will be generating revenue that had not been there prior to the taxes they do actually receive and through the company spending money in the economy and employing workers. The region that loses the business is also greatly affected by the business leaving. This causes loss of revenues and loss of money being poured into the economy from the business. That will in turn cause the region to take a look at their tax rates and after enough business leaves, they will have to lower the rates.
The continued globalization allows major corporations to hire lawyers and accountants to find loopholes or different ways to get around paying the taxes they normally would have to. These multinational corporations can also exploit these tax havens and hide their true profits. This is done through offshore tax havens, fraud, and through transfer pricing. A tax haven is a country where tax rates are lower than other countries. Transfer pricing is the setting for goods and services sold between controlled entities within the same enterprise. This occurs between subsidiaries and parent corporations. These practices are causing an estimated $100 billion to $200 billion loss on tax revenues worldwide. Many wonder why this is such a large problem. For countries like the United States, corporate bailouts, and corporate welfares are extremely expensive. So for a lot of these companies to cross borders in order to get lower taxes, then when times get tough they are going to need a handout from the government in order to get out of their financial problems. Where will this money come from if corporate taxes continue to be lowered to keep businesses in the country they are currently operating? This will also hurt the government assistance being provided to the citizens of the country. For both rich and poor this would be a problem, people who rely on this money will be left without the proper care and assistance. Statistics show that when people are put in situations where they can't afford to eat or get their daily needs, crime generally goes up in those areas. Normally out of necessity to get the daily requirements for living. The problems associated with companies taking advantage of saving money stretches far outside the business world and could potentially create major problems for the economies they are doing business in.
Globalization makes it harder for a government to generate tax revenues from multinational corporations, because if pressed these companies will move capital and labor overseas to a cheaper tax rate. We can only hope that governments will figure out a way to work together and improve these tax laws that are currently in place because without new laws we could see a lot of American companies leaving for different regions. Why pay more when you can pay almost nothing?