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Definition: taxation from Collins English Dictionary


1 the act or principle of levying taxes or the condition of being taxed

2 a an amount assessed as tax b a tax rate

3 revenue from taxes

› taxˈational adj

Summary Article: Taxation
From Encyclopedia of Global Studies

All countries need a certain level of income from taxes and duties to pay for public-sector expenditures. Globalization has an impact on the way that it is possible for different nations to collect taxes and duties, and it impacts the degrees of freedom regarding decisions relating to the structure of the tax system as well as the level of various taxes and duties. This entry discusses taxation in a global context by, first, presenting core issues with regard to taxation and the possible impact on (following the classical distinction between taxes and duties according to R. A. Musgrave and P. B. Musgrave) allocation, distribution, and stabilization in a society. Next, the entry proceeds by discussing how and to what degree nation-states can decide on the tax structure and level of taxes and duties in a global and regional world, including, as an example, the EU agreement on some common principles for value-added tax (VAT). Finally, the entry also presents and discusses an example of a suggested international tax—the Tobin tax—and the pitfalls and dilemmas attached to this.

Taxes, Duties, and the Tax Structure

Taxes and duties are defined as payments where no rights are accrued due to the payment. A tax or duty can be levied throughout the economic system; for example, all transactions with goods and services might be eligible for the imposition of a tax or duty. Taxes can be imposed on direct transactions and on the ownership of certain types of goods, such as cars and houses.

The tax structure differs among countries and often is dependent on historical traditions and local economic systems. Open economies with many transactions have one type of tax system and more closed economies have other types. Furthermore, the tax structure and size of taxes and duties depend on the size of public sector expenditures. In more mature welfare states, the tax level is correspondingly higher.

In countries with a developed ability to ensure tax compliance, for example, by intensive use of information technology systems and control of the flow of money, income tax might be used to a higher degree than in other countries, where, for example, taxation of car use (by, e.g., requiring a visible sign in the car that payment has been made) or other clearly identifiable goods can be a more efficient tax instrument. Duties on imported goods can be an instrument to finance public sector expenditures, but this is less likely today due to increased international free trade and free trade agreements. Duties on imported goods can also reduce pressure on the balance of payments, thus indicating that taxes and duties have several functions in the economy.

Taxation is having an impact on the economic functioning of the various markets—labor, capital, and markets for goods and services. The way to discuss and measure this is by comparing the situation with a purely theoretical one without any taxes or duties. This is, therefore, a theoretical comparison, as all countries need income to finance public-sector spending—the aim of the exercise being to try to develop a tax system with as few market distortions as possible.

Taxes and Duties: Impact on Distribution, Allocation, and Stabilization

The impact on distribution is one of the consequences of financing the public sector. Taxes and duties can influence economic distribution in various ways; for example, high- and middle-income households pay more in tax than low-income households. This can be achieved by having a progressive income tax but also by having more duties on luxury goods and by the level of thresholds before paying tax. This implies that income distribution may become more equal (measured by the Gini coefficient) after taxes.

Taxes and duties have an impact on the allocation of resources among different sectors in an economy; for example, a high duty on some goods is likely to influence the amount of a certain product bought rather than another. Thus, some countries might also prefer to tax goods and services where there is no or only limited local production in the home country. Decisions on where to levy taxes and duties can thereby have an impact on the allocation of resources, as well as on how consumers spend their money. Higher duties on alcohol, cigarettes, and unhealthy foods are thus expected to allocate money away from this type of consumption to more healthy types of consumption.

Taxes and duties can be used to help stabilize a country's economy by an increase or a decrease in the level of taxes and duties depending on whether the economy is booming or sluggish. This is a policy instrument that is available for fine-tuning economic development, depending on how open the economy is. (Change in public-sector expenditures can also have an impact on the stability of a country's economy.)

Influencing allocation, stabilization, and distribution can be contradictory. An increase in taxation so as to stabilize a country's economy can conflict with aims relating to distribution and allocation by causing more people to become unemployed. Decision makers thus often face a trade-off between the various types of impact that taxes and duties have.

Open economies face more threats to the tax and duty systems compared to closed economies such as those that participate less in world trade. This has been seen in the case of corporate income tax reductions, sometimes labeled “harmful tax competition.” However, given the free movement of workers, capital, goods, and services, the small countries' economies—including the economies of many European countries—are, in general, more open economies. This implies that changes and pressures from developments in the fiscal system in other countries may have an impact on the options available for structuring national tax and duty systems. In recent years, tax competition in the area of taxation of companies, including tax-free zones in some countries, has augmented the possible choice on types and levels of taxes and duties. The impact of globalization through tax competition, therefore, can also be viewed as one of the reasons for changing the tax systems.

Changes in the Tax System in a Global World

These changes have especially focused on broadening the tax base or increasing taxation on immobile factors compared to mobile factors. Immobile factors are elements such as housing, water, and heating, whereas mobile factors can be seen especially in the market for capital goods, as capital can be moved around the world within a few seconds. Labor might, to a certain degree, be mobile; however, the combination of taxes, duties, and public-sector services makes the calculation for the individual more difficult and implies that a rational person, seeking to maximize utility, cannot just think about the tax level if thinking about using the exit option from one country to another. The broadening of the tax base, which has taken place, implies fewer deductions in the tax base and thus the opportunity to collect the same revenue with a lower tax rate.

The impact of global developments can also be witnessed with regard to what have been labeled tax havens, tax shelters, and so on. These terms refer to countries where companies pay only a comparatively limited amount of tax. Transfer pricing, in particular related to multinational companies, has been at the fore of the discussion, as transfer pricing to a certain degree makes it possible to place company income in countries where the tax rate and the way the taxable income is calculated make it possible for companies to reduce the amount of tax they pay.

This is also an indication that the definition of the tax base is in itself absolutely relevant and most likely will vary from country to country. Omissions and loopholes within the system may increase the overall level of taxes and duties for taxpayers compared to those systems dealing mainly with only a few loopholes and lower tax levels. Deviation from the normal tax system is labeled tax expenditures. This also reflects that it is possible to “spend” public money through the tax system instead of through public-sector expenditures. Tax expenditures tend to have an upside-down effect.

Lower income taxes on companies have been part of a global trend, which might be seen in the light of tax competition among countries. The overall impact of taxes on companies' income depends, however, not only on the tax rate but also on the often complicated and difficult issues related to global taxation, transfer pricing, and so forth. The splitting in the tax system toward a more distinctly dual tax system between income and capital taxations (with lower taxes on capital) can be considered as part of this development.

If the starting point is to reduce the problem of international mobility of labor and capital, then, as mentioned earlier, taxes and duties on immobile factors are important. This is the case with taxes and duties on land, houses, electricity, and water. This is further due to the fact that higher income groups spend a higher proportion of their income on immobile factors, thus having to pay a higher amount of tax if they are placed on immobile factors, which are more difficult to avoid when actually living in a country.

Duties can vary among countries in terms of level and types of goods and services. However, if there is free movement of goods and services, then possible cross-border trade reduces the differences that can exist among countries. If the difference is too high (presumably above 5 to 7 percentage points), then consumers will travel to the other countries and buy the goods and services there, and, consequently, those countries can collect the duties. In the European Union, for instance, there is an agreement on a VAT directive implying that all member-states agree on how to define the tax base and which goods and services might be exempted from VAT. There is further agreement that the maximum VAT is 25%. This is an example, within a region, that there might also be a need to agree on certain common rules to avoid “harmful” tax competition taking place.

Another example of the problem of tax competition is the so-called Tobin tax, named after the economic Nobel Prize-winner James Tobin. He has suggested that a small tax should be levied on all international tax transfers. This has recently been put forward as a suggestion in the wake of the international financial crisis in order to build up a stabilization fund. In principle, such a relatively small tax on all capital transactions could yield a large amount of money, which could then be used either to create a fund to be used in times of international financial crisis or as a transfer to the developing countries. A small tax would reduce the number of speculative transactions, as it would be relatively more important in these cases than in transactions having a longer time frame. The main problem with this, however, is that such a tax is only possible if all countries agree on it. If just one or a few countries are unwilling to impose it, then the market for capital transactions could move to them. At the least, the largest and most affluent countries will have to agree on imposing such a tax.

See also:

Banking, Offshore, Banks, Corporations, Transnational, Economic Development, Global Economic Issues, International Monetary Fund (IMF), Law, Transnational, Monetary Policy, Organisation for Economic Co-operation and Development (OECD), Tobin Tax, Trade

Further Readings
  • Auerbach, A. J., &Feldstein, M. (Eds.).(2002) Handbook of public economics (4th ed.). Amsterdam: North-Holland.
  • Barr, N.(2004) Economics of the welfare state (4th ed.). Oxford, UK: Oxford University Press.
  • Begg, D.(2009) Foundations of economics. London: McGraw-Hill.
  • Brown, C. V.Jackson, P. M.(1990) Public sector economics (4th ed.). Oxford, UK: Blackwell.
  • Devereux, M. P. (Ed.). (1996) The economics of tax policy. Oxford, UK: Oxford University Press.
  • Greve, B.(2010) Taxation, equality and social cohesion: European experiences. In Zupi, M. & Puertas, E. E. (Eds.), Challenges of social cohesion in times of crisis: Euro-Latin American dialogue(pp. 307-332) Madrid, Spain: FIIAPP.
  • Musgrave, R.Musgrave, P.(1989) Public finance in theory and practice (5th ed.). New York: McGraw-Hill.
  • Salanie, B.(2003) The economics of taxation. Cambridge: MIT Press.
  • Slemrod, J. (Ed.). (1999) Tax policy in the real world. Cambridge, UK: Cambridge University Press.
  • Greve, Bent
    Copyright © 2012 by SAGE Publications, Inc.

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