The Uncertain Impact of Globalization on Taxation

The impact globalization has on taxes is a subject that has been up for debate for years. There is little definitive or consistent evidence that indicates how globalized trade can affect a country’s tax policy, despite the fact that the subject has been researched and discussed at great length. It would be more appropriate to say that there is probable, yet questionable evidence of a connection. There is an abundance of data available that has been collected to try and find a clear relationship. The trouble is that there is potential for so many uncontrolled variables in each study, making it difficult to determine if a change in tax policy is in fact being caused by globalization, or something else. Factors such as the extent of the globalization, the types of goods being traded, can have different impacts on a country’s tax policy. In turn, characteristics of the country in question can also factor into to how taxation can be effected, such as the country’s form of government, its culture, its wealth, its natural resources, and its current tax policy.

An article entitled “Globalization, Taxation, and Burden-Shifting in Latin America” entertains the notion that globalization can have a negative impact on taxes, especially in developing countries. Specifically, it can be argued that market integrations lead to a decrease in the quality of a democracy, thus limiting its ability to tax as it deems necessary. Some countries tax very conservatively or not at all, in order to attract foreigners with a free and easy place to do business. However, some underdeveloped countries can become dependent on outside trade to the point where governments will favor market integration over its own citizens.

In contrast, an article entitled “Globalization and Capital Taxation in Consensus and Majoritarian Democracies” argues that there is a positive relationship between globalization and taxation. It makes a case that people don’t necessarily race to the place with the lowest tax rate when they conduct business. Developed countries with reasonable a reasonable degree of freedom tend to welcome globalization, as the people in those countries, tend to be more wealthy. Businesses tend to tolerate a little taxation if it means having access to a wealthy customer base. Because of this, it is likely that countries with middle level tax rates are more attractive to businesses than many low tax rate countries.

Another article, “Globalization and Taxation: Challenges to the Swedish Welfare State” also argues that globalization has a minimal effect on taxation. Since Sweden has one of the heaviest tax policies in the world, it makes sense to use it to see how globalization can affect it. It did have some adjusting to do, but overall, researchers were surprised by what they found. Sweden’s big tax policy was not nearly as detrimental to globalization as was hypothesized.

There have also been studies (specifically one published in The Journal of Macroeconomics) that indicate that a market free from government regulation and taxation provides a big advantage to globalization. However, that same study concluded that there are some instances of the opposite holding true. In the end, the study came up inconclusive. Evidence shows that governments have been known to keep taxation and regulations down in order to attract investments.

In conclusion, no definitive answer has been reached regarding the effect globalization has on taxation. However, it can definitely be said that globalization can lead to some changes in the policies of taxation. Governments have a history of changing their tax laws one way or another in hopes of attracting globalization. That’s just one example though. Many different correlations have been observed between globalization and taxation, and the results often contradict each other. It seems clear that globalization can have many various effects on taxation.