Sharing the spoils of globalization: Mission impossible? The gains from globalization are large but very unequally distributed. For example, mobile capital can easily escape taxation, whereas immobile workers bear the excess burden. How can governments redistribute the gains more equitably? A study by ESADE Associate Professor Calin Arcalean shows how public debt can help workers when countries engage in tax competition over mobile capital. Many of the drawbacks of globalization are by now obvious. Former US president Barack Obama recently observed: "When we see people, global elites, wealthy corporations seemingly living by a different set of rules, avoiding taxes, manipulating loopholes ... this feeds a profound sense of injustice. [...] The current path of globalization demands a course correction [...] to make sure that the benefits of an integrated global economy are more broadly shared by more people, and that the negative impacts are squarely addressed." In a recent study published in Economic Inquiry, ESADE Associate Professor Calin Arcalean shows how such a course correction -- aimed at achieving a better redistribution of the gains of globalization -- might already be in place, in the form of public debt. Moving capital across borders has become a normal activity in today's globalized world. Sometimes the reason for moving capital to other countries has solid legitimate business purposes; other times it is a strategy for tax evasion. "Globalization has allowed capital owners to 'shop around' for lower tax rates and freely move to other countries that may offer better tax conditions," says Arcalean. This fact has given rise to competition among governments to set lower tax rates to attract capital. Public debt and redistribution While tax competition has been around for some time, the connection to public debt is not well understood. Arcalean's analysis reveals that tax competition and capital mobility across national borders may contribute to increasing public debt. Why would this happen? "Tax competition for capital among governments may also increase income inequality between capital owners and workers. In this case, issuing public debt becomes a way to redistribute income in a context where redistribution through taxation is made very difficult." The model shows that raising public debt can reduce the tax burden on workers because it allows a higher share of public spending to be financed with future revenues from capital income taxes. Lower taxes don't necessarily mean less tax revenues To understand these findings, it helps to recall that in most rich economies, corporate tax revenues as a share of total tax revenues are constant despite declining tax rates. How is this possible? "In addition to other factors, such as broadening the tax base, a direct effect of persistently low capital tax rates is that capital owners will get richer, which contributes to an increase in the global stock of capital," says Arcalean. While restricting the ability of national governments to tax capital, globalization also incentivizes policymakers to play a game between present and future. Despite the inability to increase capital tax rates, knowing that tomorrow there will be more capital to tax allows governments to issue more public debt today, in an effort to push more of the public spending burden onto future periods when capital taxes will generate relatively more revenues. "My research shows that public budget deficits can ease redistribution and thus help reduce income inequality in a globalized world. I believe this additional dimension is important in the current debate on fiscal sustainability and more generally on the role of fiscal policy in developed economies," concludes Arcalean.

ESADE

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How public debt can reduce income inequality

10/2017

Sharing the spoils of globalization: Mission impossible?


The gains from globalization are large but very unequally distributed. For example, mobile capital can easily escape taxation, whereas immobile workers bear the excess burden. How can governments redistribute the gains more equitably? A study by ESADE Associate Professor Calin Arcalean shows how public debt can help workers when countries engage in tax competition over mobile capital.


Many of the drawbacks of globalization are by now obvious. Former US president Barack Obama recently observed: "When we see people, global elites, wealthy corporations seemingly living by a different set of rules, avoiding taxes, manipulating loopholes ... this feeds a profound sense of injustice. [...] The current path of globalization demands a course correction [...] to make sure that the benefits of an integrated global economy are more broadly shared by more people, and that the negative impacts are squarely addressed."


In a recent study published in Economic Inquiry, ESADE Associate Professor Calin Arcalean shows how such a course correction -- aimed at achieving a better redistribution of the gains of globalization -- might already be in place, in the form of public debt.


Moving capital across borders has become a normal activity in today's globalized world. Sometimes the reason for moving capital to other countries has solid legitimate business purposes; other times it is a strategy for tax evasion.


"Globalization has allowed capital owners to 'shop around' for lower tax rates and freely move to other countries that may offer better tax conditions," says Arcalean. This fact has given rise to competition among governments to set lower tax rates to attract capital.


Public debt and redistribution


While tax competition has been around for some time, the connection to public debt is not well understood. Arcalean's analysis reveals that tax competition and capital mobility across national borders may contribute to increasing public debt.


Why would this happen? "Tax competition for capital among governments may also increase income inequality between capital owners and workers. In this case, issuing public debt becomes a way to redistribute income in a context where redistribution through taxation is made very difficult."


The model shows that raising public debt can reduce the tax burden on workers because it allows a higher share of public spending to be financed with future revenues from capital income taxes.


Lower taxes don't necessarily mean less tax revenues


To understand these findings, it helps to recall that in most rich economies, corporate tax revenues as a share of total tax revenues are constant despite declining tax rates. How is this possible? "In addition to other factors, such as broadening the tax base, a direct effect of persistently low capital tax rates is that capital owners will get richer, which contributes to an increase in the global stock of capital," says Arcalean.


While restricting the ability of national governments to tax capital, globalization also incentivizes policymakers to play a game between present and future.


Despite the inability to increase capital tax rates, knowing that tomorrow there will be more capital to tax allows governments to issue more public debt today, in an effort to push more of the public spending burden onto future periods when capital taxes will generate relatively more revenues.


"My research shows that public budget deficits can ease redistribution and thus help reduce income inequality in a globalized world. I believe this additional dimension is important in the current debate on fiscal sustainability and more generally on the role of fiscal policy in developed economies," concludes Arcalean.

More Knowledge
International tax competition and the deficit bias
Arcalean, Calin
Economic Inquiry
Vol. 55, n 1, 01/2017, p. 51 - 72
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