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THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 3

Looking at the effects of international tax competition so far, it is hard to argue that we see anything close to equivalent overall capital tax rates across countries, or equivalent levels of social spending. For example, Germany, which has long had an open capital account, devoted 21.2 percent of its GDP to government social security payments and transfers in 1995, compared to 13.9 percent in the United States. The ratio for France was 25.7 percent in the same year. S0rensen (1993) observes that proceeds from the corporate income tax did not fall over the 1980s in industrial countries, either as a share of GDP or of total revenues, despite generally lower statutory tax rates. The reason was a broadening of the corporate tax base.

It is difficult to say how far global tax competition might go in the long run. Eichengreen (1990) finds that the variability of state tax rates in the United States (through the early 1980s) was 40 percent below that among European Union states, but far from zero. It is hard to measure the differential levels of public goods that states might provide (in the form of infrastructure and so on) or other special locational incentives they might offer. However, the U.S. states have a much higher degree of economic integration than do the nations of Europe. Thus, a cautious conclusion would be that the global capital market will push countries at most part way toward the predicament Rodrik (1997) fears.

To the extent the problem does arise, however, how can countries best deal with it? Overt restrictions on capital outflows seem an inefficient way to address the issue; they would be difficult and costly to enforce, they imply resource misallocations, and there is no support in the business community for preventing capital outflows. For countries that face revenue shortfalls in financing necessary social protection programs, it would be far better to shift from capital taxes to a consumption tax rather than to a tax on labor incomes. (There is already a trend in industrialized countries toward heavier taxation of consumption; see King, 1996.) Furthermore, many industrial countries’ social protection programs could offer adequate insurance at lower cost. In Europe, for example, often open-ended and largely unconditional social benefits, coupled with the employment disincentives that firms face, lead to programs that expend large sums on long-term income support rather than true insurance (Siebert, 1997).