Towards A Global Tax Net
Third, greater ease of international trading, and reductions in transactions costs are making it difficult for countries to sustain large tax differentials with others. This is especially true for products with high value but little weight or volume, such as perfumes, electronic goods and jewellery. So countries with high tax rates on such commodities are under great pressure to reduce them, which is adversely affecting the tax-base as well as tax policy autonomy.
The role of routine cross-border trade among adjacent areas of two countries is also increasing. Regional free-trade agreements such as the ASEAN Free Trade Area (AFTA) are expected to give impetus to this trend. These developments have implications not only for international trade taxes but also for domestic sales and excise taxes.
Various negotiations under the WTO, such as in the area of telecommunications and information technology are also reducing the scope for levying taxes through policies of state monopolies, again leading to reduced state revenue.
Fourth, new technologies are resulting in growing importance of sophisticated barter and electronic commerce. Such commerce will also require adjustment in traditional means of allocating revenue among jurisdictions. These transactions are not yet being taxed effectively. In many countries, tax administration organizations are simply not equipped to deal with such sophisticated practices. Thus, while the application of new information technology can aid administration, it will also create many new challenges for it. For many transition economies such as Russia, globalization and new technologies are making it more difficult to collect even the existing taxes, threatening provision of basic government services.
Fifth, while environmental problems are increasingly regional and global, tax and other instruments that are used to address them remain largely national. International cooperation is needed to tackle these problems in an efficient and equitable manner. Nations are unlikely to levy environmental taxes on their own for the fear of the adverse effects on the competitiveness of the domestic industry. Countries, especially less developed countries, will want international assurances that all countries will be required to impose such taxes and less developed countries are likely to require some type of compensation from the developed world for the relatively higher burdens placed on their economies.
Environmental tax policies require considerable data relating to the sources of environmental degradation and the impact of effluent charges/taxes and related instruments on pollution. The OECD countries have made reasonable progress in these matters. However, in other countries, including the rapidly growing east Asian countries, progress in developing emission inventories and other relevant environmental data has been very limited.
Sixth, by making it more difficult to tax the full range of economic activities, globalisation is making it much more difficult to attain fiscal sustainability. To be sustainable, budgetary revenue and expenditure should be consistent with the macroeconomic objectives of high employment, low inflation and the desired exchange rate. The burden of such adjustments is increasingly falling on the social sector and on governments capital and infrastructure expenditure at the time when the need for both is quite great. With growing inequalities and economic insecurity within the among nations, and with historically high unemployment rates in certain regions such as Europe and ageing populations in many part of the world, there is an increasing need to spend more on the social programs; but the actual trend and ideological momentum is in the other direction. Moreover, tax structures are becoming less progressive.
Tackling these factors and achieving fiscal sustainability has the potential to create a serious backlash against globalisation, the contours and consequences of which are difficult to predict now. What this suggests is that downgrading equity issues in tax and fiscal policies too much would be risky. What is clear is that significant and far-reaching changes will be needed to make the level and structure of current tax systems appropriate for the 21st century. As has happened with international trade, countries will need to come to terms with reduced autonomy in tax policy.
At the same time, the international community must not neglect the responsibilities of individual countries. Governments have established social contracts with labour and business within their borders. As tax and trade laws change, there is a need to address the transition costs when people lose their jobs and marginal firms close.
Often, the problem is not just the actual job losses, but a significant shift towards less permanent employment which provide few social security and health care benefits. As a result, economic insecurity has increased, even for the educated and skilled workers. If these problems are ignored, social conflict and discontent can undermine aggregate economic gains.
There have already been some proposals to deal with these aspects of globalisation. Examples include Jagdish Bhagwatis proposals for international cooperation in enabling source-countries to tax emigrating professional manpower, Tobins proposal to levy a small tax on exchange transactions to deal with financial volatility, and OECDs efforts to develop an investment code, including rules for tax competition.
Efforts at comprehensive and rigorous analysis of the changes needed are, however, at an early stage. Tax (and fiscal) policy is at the heart of any countrys political economy. Therefore, rapid or smooth progress in reforms is not expected. Vito Tanzi, the influential director of the International Monetary Funds fiscal affairs department, has argued that some sort of global tax organization, along the lines of the WTO, may be necessary to enable systematic thinking on the need for international cooperation. But this is unlikely to be a high priority on the worlds agenda.
A more feasible course would be for regional organisations such as the APEC (Asia Pacific Economic Cooperation), ASEAN (Association of Southeast Asian Nations), MERCOSUR (Southern Core Common Market in South America) and others to pay much greater attention to tax and fiscal policy issues, both in their internal working and in their interactions with each other.
Regardless of the course chosen, the journey promises to be a fascinating one, with material consequences for individuals, businesses, countries and the world as a whole. The process of reform must also strike a balance between the ideal tax system and practical needs. Far too often the need for clarity and simplicity of tax law and integrity and professionalism in administration is lost in the search for higher ideals.
Tax systems of the 21st century will only meet the needs of society, if they can first gain acceptance from the public, the business community and the government officials who are relied upon for implementation and day to day operation.
(Mukul G Asher is Associate Professor of Economics and Public Policy at the National University of Singapore; Thomas P Snyder is Senior Fellow in Public Policy at the same institute)
Concluded