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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

AsiaweekTimeAsia NowAsiaweek

MARCH 24, 2000 VOL. 26 NO. 11

No Race To The Bottom
False fears of globalization include "tax competition"
By CHRISTOPHER LINGLE


Asiaweek Pictures
Christopher Lingle is an independent global analyst whose most recent book is the Rise and Decline of the Asian Century

One of the most pressing issues about globalization is the impact upon governments' ability to collect taxes. In dealing with this question, it is obvious that the primary agent and effect of expanding global markets are measured by the increased mobility and fluidity of capital.

Bureaucrats at the Paris-based Organization for Economic Cooperation and Development (OECD) - whose incomes are paid by tax revenues raised by the member states - and those in other transnational organizations like the European Union anguish over the effect of so-called tax competition. The expressed fear is that countries will engage in a competitive process of internecine tax reductions in order to attract wayward capital.

There is a false presumption that such competition will involve a mutually destructive "race to the bottom" where governments and citizens alike are helpless before the might of global capital. In fact, the most likely result of competition among governments is that they will be forced to become more efficient providers of a better mix of publicly funded goods and services. Faced with the prospects of having to downsize themselves, it is no wonder that bureaucrats are squealing like stuck pigs.

 
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THE NATIONS
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• Security: Why Beijing is getting deeper into blue water
Malaysia: Behind the attacks on Astro
India/Pakistan: Clinton is going to South Asia. Is that a good idea?
• Interview: Cohen says the U.S. will not mediate Kashmir
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• Military: Call it "de-Wiranto-ization"
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Viewpoint: False fears about globalization

ARTS & SCIENCES
Education: A child's murder rouses a debate about parenting
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• Movie: Beating the exam odds in reel life
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Design: Activists' fashion statement in the Philippines
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The Net: South Korea's online stock-trading mania
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Amidst this hysteria, owners of footloose capital are often portrayed to be feckless patriots. Instead, the real traitors to national patrimony are incompetent bureaucrats and politicians whose lack of foresight at the consequence of their actions is pushing capital offshore. Businesses usually move only after there is a significant change in the treatment of their income earned from one of their areas of competence.

In all events, the push factor is likely to be more important than the pull of low taxes. On their own, low tax rates are no more attractive than cheap wages. Both of these are definitely important considerations that capital owners weigh, but they are amongst a constellation of many others. Just as important is the reliability and transparency of the regulatory environment as well as whether the courts in the jurisdiction are guided by the rule of law.

Were cheap wages or low taxes the deciding factors, capital would be flooding into much of Africa and parts of the Middle East. Instead, more interest is shown in offshore locales like Bermuda, Ireland, Switzerland or Hong Kong, where governments work hard to make themselves attractive to quicksilver capital. In so doing, there are no visible sacrifices in the amenities of life available to the citizens of those different societies.

Suggestions that capital movements as a method to avoid taxes are the acts of an exclusive and exploitative class of capitalists seem to be derived from a logic emanating from a Marxian time warp. Unlike at the start of the Industrial Revolution, owners of capital are just as likely to be workers. And the interests of worker-capitalists are best served when their pension or mutual fund managers put their assets to work where they generate the highest net yield.

If one is truly to consider taxation from a global perspective, it should be noted that a small number of the very rich pay the lion's share of taxes in emerging as well as developed economies. This is true despite their best efforts to avoid taxes by hiring accountants who aid them in taking advantage of loopholes or deductions.

Meanwhile skilled workers can be as mobile as capital. Especially those in the information industry, who can be virtually mobile in plying their trade over the Internet. At the same time, it will become even less important that skilled workers or those employed in bricks-and-mortar industries are geographically immobile as long as their capital is not. Global capital flows will actually democratize access to tax havens that were once the exclusive domain of the very rich and the well connected.

A dominant concern among more humanitarian critics of globalization is the threat to the ability of governments to provide social safety nets. Yet this too is exaggerated. Public provision of social security assistance could become less important if governments remove policies inhibiting innovation or restraining growth. Restraints on competition or rigidities in labor markets create distortions in the rest of the economy and are caused by imprudent government mandates. Greater prudence in policymaking can remove the basis of many economic maladies that lead to a demand for social security.

It is true that there will be costs as there are in the wake of any major economic and social transformation, as is being forged by the forces of globalization. And these costs will motivate resistance to this change. However, the motives of naysayers should be examined to see if they are protecting some clique of special interests or truly taking the best interests of the global community to heart.

Discussions of the impact of globalization must be made in a dynamic context so that the prospects of net benefits likely to accrue to most actors in most economies can be seen. After all, international capital movements lifted more people out of poverty and improved global well-being better than all the well-intentioned aid given over the past three decades.



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