How globalisation can help or hinder the tax base

What effect is globalisation having on the tax base? Joshua Aizenman and Yothin Jinjarak argue in NBER Working Paper No. 11933 that globalisation should boost trade and financial integration, enabling a move towards 'harder to collect' taxes. The abstract for Globalization and Developing Countries - A Shrinking Tax Base? (alternative PDF version available here) explains why:

This paper evaluates the impact of globalization on the tax bases of countries at varying stages of development. We see globalization as a process that induces countries to embrace greater trade and financial integration, and macro stabilization. This in turn should shift their tax base from "easy to collect" taxes [tariff, seigniorage, etc.] towards "hard to collect" taxes [VAT, income tax, etc.]. We confirm this prediction -- the revenue/GDP ratio of the "easy to collect" taxes declined by about 20% in developing countries between the early 1980s and the late 1990s, while the revenue/GDP of the "hard to collect" taxes increased by 9%. The relatively small initial base of "hard to collect" taxes in developing countries implied a net 7% drop in total tax revenue/GDP.

Applying panel regressions and controlling for structural factors, we find that trade openness and financial integration have a positive relationship with "hard to collect" taxes, and negative relationship with the "easy to collect" taxes. The effects of globalization in our panel regressions are even larger than the effects of the institutional and political variables combined. Fiscal revenue from financial repression has also decreased, further reinforcing these results. The high income and the middle income countries managed to more than compensate for the revenue decline of the "easy to collect" taxes, increasing the total tax/GDP.

In contrast, the upper and low income developing countries experienced sizeable drop in the tax/GDP. We also identify fiscal convergence: the coefficient of variation of tax revenue/GDP measures across countries declined substantially during 1980s - 1990s. The cross country variation declined by about 50% for seigniorage, about 30% for tariff, and about 15% for the "hard to collect" taxes. These results are consistent with the notion that improving the performance of the "hard to collect" taxes is more challenging than reducing the use of "easy to collect" sources of revenue.

ERRATA: This post was originally entitled: How globalisation can help the tax base. However I accept Lord's point (see comments below) that this was misleading.

Comments

[EB]

could this possibly lead to the reconsideration of the flat tax as a viable solution?

[Lord]

Isn't your heading misleading, unless your objective is to avoid paying taxes?

[Gabriel Mihalache]

Globalization also means that many efforts are redundant across governments, therefore governments could shrink in some areas without any loss of services (such as they are). Th EU has the potential, as an institution, to take on some of the redundant institutions of the member states, granted it can act efficiently, which is rather doubtful when it comes to big, federal institutions.

On another note, of course, the paper is good news for radical libertarians, such as myself. The only State policies we support are those that restrict or eliminate the State from a field. ;-)

On a non-partisan note, I think we shouldn't fear this. If there's one thing our dearest rulers are good at is figure more and more ways of getting more tax income. (Oops, that wasn't as non-partisan as I thought.)

[New Economist]

Lord, I accept your point and have amended this post's title. Thanks

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Searched for the information on this theme, and only here I found it. The EU has the potential, as an institution, to take on some of the redundant institutions of the member states, granted it can act efficiently, which is rather doubtful when it comes to big, federal institutions.