Magazine article USA TODAY

Tax Competition Spurs Globalization. (Worldview)

Magazine article USA TODAY

Tax Competition Spurs Globalization. (Worldview)

Article excerpt

GLOBALIZATION is steadily and inexorably knitting separate national economies into a single world economy. Basic economic forces so far have outweighed political efforts to slow this trend. Efforts to buck the effects of economic integration have ranged from anti-globalization protests to Congressional efforts to prevent American companies from reincorporating abroad.

The economic forces behind globalization include rising trade and investment flows, greater labor mobility, and rapid transfers of technology. Those trends have been spurred by the deregulation of financial markets, reductions in trade barriers, and lower communication costs.

Most economists support globalization because it raises the incomes of people worldwide. Another lesser-noticed benefit is that it makes it harder for governments to sustain excessively high tax rates. When economic integration increases, individuals and businesses gain the freedom to take advantage of low tax rates abroad. As a result, countries with high tax rates face large economic losses when borders are opened because people and capital flow out. As capital and labor become more mobile, international "tax competition" increases.

Smart nations are treating international tax competition as an opportunity, not a threat. Ireland, for example, has had remarkable economic success as a result of its low-tax strategy adopted in the 1980s. This country of 3,800,000 people has attracted more foreign direct investment than either Japan or Italy in recent years. The main draw has been a low 10% corporate tax rate. Ireland has boomed from investment inflows and now has a per-capita income level higher than Great Britain or France.

Some nations are responding to tax competition in defensive and unproductive ways. High-tax countries have prodded international organizations, such as the Organization for Economic Cooperation and Development (OECD), to curtail tax competition. The idea essentially is to create a high-tax cartel by limiting the advantages offered by low-tax countries. In addition, many nations are adding layers of complex roles on businesses to discourage them from investing abroad, rather than reducing tax burdens so that businesses want to invest at home. The U.S. falls into this category since it has one of the highest corporate tax rates. Nevertheless, America continues to put off long-needed reforms.

Rising international tax competition is a reality that Federal policymakers must respond to in a thoughtful and productive way. Fundamental tax reforms should be pursued to encourage investors and businesses to invest in the U.S. in order to generate rising American incomes.

Since the 1970s, most countries have reduced or eliminated exchange controls, allowing citizens to buy foreign securities and foreigners to invest domestically. Financial markets have been deregulated in many nations, thus making investment abroad more attractive than ever. The result has been an explosion in cross-border investment. Net world flows of investment capital soared from a few hundred billion dollars per year in 1990 to roughly two trillion dollars per year today. Countries that want to attract these flows must get the economic fundamentals right by establishing a stable currency and having trustworthy legal roles. Indeed, dozens of nations have made market reforms during the past decade or so. As a result, more countries offer better investment opportunities than in the past. International investors have become more sensitive to differing national tax rates as their investment options have increased.

Consider also that many businesses used to invest abroad simply to gain access to fixed resources, such as oil deposits. Today, many industries--such as finance and services--are footloose and can be located anywhere. Thus, corporations have greater ability to move their operations to low-tax jurisdictions. Numerous studies have confirmed the importance of taxes to investment decisions. …

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