Abstract
The aim of this chapter is to investigate the potential impacts of globalization on tax revenues with reference to theoretical explanations within the context of tax and globalization. In the study, G10 country group and the data belonging to these countries between the years of 1990 and 2015 are used. In order to determine the relationships between tax revenues and globalization, cross-sectional dependency test, slope heterogeneous tests, and bootstrap panel Granger causality tests were used to understand the direction of causality between long-term coefficient estimations and variables. While the results of the long-run coefficient obtained from the study show differences according to the countries, a bi-directional causality relationship is determined between tax revenues and foreign trade. The diminishing effect of globalization found on the tax revenues of nation states considered within the scope of the study. It can be thought that these outcomes may provide some preliminary information to policymakers.
TopIntroduction
Although there are various opinions on exactly what is wanted to be described by the concept of globalization, it is seen that explanations are fundamentally going through two planes. The first plane is the impacts of globalization on economic processes. The second one refers to a more comprehensive characterization which refers to the change in all social life processes. This second plane contains factors such as the speed of communication and ease of travel that are brought about by technological developments (Tanzi, 1996). If we go back to the first plane, this process, which commenced particularly in the mid-1980s (Kazgan, 2009; Giray, 2005), refers to three changes within the economy by virtue of technological developments. These are; free market economy, free foreign trade and free capital movements (Kazgan, 2009). On the other hand, the concept of globalization comes to mean the high rate of dependency created by one country on the rest of the world, and impacts of many national policies beyond the boundaries of a country (Tanzi, 2004; 1996). However, it is useful to note that the concept of globalization is not the subject of this study due to its scope.
When we consider globalization as a phenomenon, putting conceptual debates on one side and focusing on the results of this phenomenon will at least make it more comprehensible that we want to express in this study. When the consequences of globalization are approached in the context of tax; creative destruction caused by increasing technological vigor1 (Asher & Rajan, 1999; Tanzi, 2000) and removal of national boundaries (Razin & Slemrod, 1996) brought about many changes in economic and social fields and have also created various effects on tax and tax systems or tax policies. In this context, the tax policy of a country may affect economic activities in other countries (Razin & Slemrod, 1996). The European Union is a good example of this (Tanzi, 1996). The interaction between globalization and fiscal policies is generally stated under two headings according to Garret & Mitchell (2001) (Bretschger & Hettich, 2002, Sert, 2011). The first is named as efficiency hypothesis and the second one is named as compensation hypothesis (Bretschger & Hettich, 2002). According to the efficiency hypothesis, capital and firms, which are described as moving factors, have the possibilities to escape from tax. In order to avoid possible tax erosion to occur in tax revenues in the nation state, (Bretschger & Hettich, 2002) prefers higher taxation over relatively less mobile factors which are labor income and consumption (Garret & Mıtchell, 2001). Compensation hypothesis, on the other hand, suggests that there is a linear relationship between globalization and public expenditures, the fragility of the country's economies increase due to increased globalization and this produces effects that increase the inequalities in the economy. Against the negative effects of trade openness on citizens the approach of welfare state steps in and eliminate the potential negative effects of globalization through public expenditures. (Rodrick, 1998; Garret & Mitchell, 2001; Swank, 1998). This process can also bring about the end of the welfare state (Sert, 2011).
Key Terms in this Chapter
Compensation Hypothesis: Suggests that there is a linear relationship between globalization and public expenditures, the fragility of the country's economies increase due to increased globalization and this produces effects that increase the inequalities in the economy.
Fiscal Termites: Effect of technology on tax systems.
Cross-Section Dependency: It is based on the assumption that any shock experienced in any unit included in the panel affects all countries equally and a macroeconomic shock experienced in any country does not affect other countries that compose the panel.
Augmented Mean Group Estimator: This method considers the common factors in the series and is also used in the presence of the problem of internalisability, which indicates that there is a correlation between explanatory variables and error terms.
Efficiency Hypothesis: Suggests that capital and firms, which are described as moving factors, have the possibilities to escape from tax.
Rubicon: A name of the river about 29 km North of Italy, is a border between the Roman Empire province of Cisalpine Gaul and the South of Italy. It is a boundary for military initiatives that could threaten the Roman Republic. Julius Caesar passed this river in 49 BC and was considered a threat to the Republic.
Technological Vigor: Creative destruction of technology.