This article is written by Pavan Kumar. R, an LLM student from O.P Jindal Global Law School, O.P Jindal Global University. In this article, the author explains the concept of One world, one tax and the benefits and disadvantages relating to the same.

Introduction

Globalization transforms various domestic economies into a single global economy. This cycle takes place through increased trade and investment, workers’ relocation and technology transfers.

Since 1990, foreign investment flows have risen approximately ten times as companies and investors have been searching for new opportunities on the international markets. The global economy is becoming “flabby,” as columnist Thomas Friedman in the New York Times addressed in a bestselling book of 2005.2 This means corporations can find and distribute goods to consumers around the global practically anywhere. 

Investors can scan their desktop computers for opportunities abroad. In one of hundreds of welcoming investments companies can collect money, employ staff and build factories.

Friedman examined these technology, skilled employees and training patterns skilfully. The globalization of capital and the importance of America to establish an investment-friendly environment were largely ignored in Friedman’s book. Friedman focused on jobs but mostly on the money neglected.

The that importance of fiscal rivalry was also overlooked by Friedman.

However, the flat world economy has strongly led to intensified tax competitiveness.

For individuals and companies free to use international incentives, economic policies have increased their attitude towards taxation. The competitiveness of these countries generates greater demand for tax rates to be reduced. 

Many of the major economies cut corporate tax rates following Britain’s leadership in the mid-1980s. In the 30-Nation Organization for Economic Cooperation and Development, the average corporate tax rate has been down from 38% to 27% since the middle of the 1990s3. In the same time, the average European Union tax rate has been falling from 38% to 24%. From 2000 onwards, corporate tax cuts included Austria (34-25%), Canada (45-34%), Germany (52-30%), Greece (40%-25%), Iceland (30-18%), Italy (41-30%), the Netherlands (30%) and Turkey (35% to 25%). 

Yet corporate tax cuts have spread beyond the countries of the OECD. In recent decades cuts were made in far-flung areas like Albania (20-10%), Egypt (40%-20%), Mauritius (25%-15%), Romania (25%-16%), Russia (35%-25%).

Substantial changes were also made to individual income tax rates. Since 1980, the OECD average top rate has dropped 26% since 1980. Again, the trends are regional, with Africa, Asia, Europe, Latin America and North America dropping at an average of the highest levels. Furthermore, 25 countries have removed their multi-rate income taxes and set up flat fees. In this ‘flat tax club,’ the average individual tax rate is just 17%. The tax rates on dividends and capital gains have also decreased for many countries. In many countries taxes on property and assets have been cut or reduced, and in many countries annual income taxes have been abolished which were once common in Europe. However, cross-border investment withholding taxes have been raising worldwide significantly. Both of these tax forms have mobile tax bases and policymakers have agreed that introducing high taxes would lead to a decrease in domestic revenues and drastic tax bases.

This is surprisingly complex in the international fiscal system.

The U.S. had one of the lowest corporate tax rates since reforms in 1986. At that moment, however, US politicians have fallen asleep while others continue to slash. The US now has the world’s second highest corporate tax rate. If a country remains quiet in today’s global economy, it falls behind.

Take into account income tax rates. The OECD average tax rate, including the burden on individuals and businesses, decreased from 50% in 2000 to 43% in 2007. The US rate of 49 percent, as a result of the recent international tax cuts, is considerably higher than the average now. Worse still, in 2011, the US dividend tax rate is projected to increase to an incredible 64%, possibly the highest level worldwide.

Policies of Tax Coordination

In general terms, three keyways seem to be possible to coordinate fiscal and other policies between countries. One approach is to “coordinate by delegation,” i.e. to set up new governments with fiscal powers across the entire spectrum of countries whose policies are to be coordinated. For example, the EU or some other institution can collect VAT, corporate income tax, personal income tax or any other tax in the whole region. Nonetheless, the WAEMU Treaty does go beyond EU tax policy and includes the convergence of at least 17% of the tax revenue-to-GDP ratio and the convergence of tax income systems in order to organize the setting of tax rates and basics for the major taxes through national directives.

This is part of the so-called “transition fiscale,” whereby WAEMU countries must adopt fiscal and tariff policies that require their income structure, over time, to change from trading to domestic taxes. The WAEMU, however, varies in different respects from the EU. Becoming a customs union and creating a single market, the WAEMU was, in practice, already a monetary union. In relation to the classical view of the economic integration process, such characteristic, shared with the CEMAC is unusual (Balassa, 1961). Other significant differences between the EU and the WAEMU, particularly in terms of the position and financing sources of regional institutions, have an undeniable impact on the functioning of tax coordination, over and above the sequences in the integration process. As in the EU, the Treaty on WAEMU (Articles 54 and 55) had provided for the funding by a share in the CET and a levy of the harmonized base of VAT by the Commission and other EU bodies — the aim, among other things, is to make it easier to enforce CET and abolish the fiscal boundaries within the Union by blinding the national budgets with the effect of the CET revenue. Nevertheless, unlike the EU, Member States have never approved legislation to enforce this in effect. The Union’s main own funding source is then limited to the PCS, a tariff imposed by an importation rate of one percent which, besides CET, applies.

Between 1996 and 2010, this source mainly supported the Member States’ reimbursement scheme for tariff loss arising from customs union establishment and the operating budget for the Union; the other projects for agriculture and national development initiatives represented approximately 25% of the PCS. WAEMU also depends on international and regional agency support and loans (38% of its 2010 budget) for the remainder of its operations. Lastly, the overall budget of WAEMU for GDP is lower than half the EU (0.47% compared to 1.1% of GDP) which does not permit WAEMU to play an important role in the regional growth. The development of the legal framework for fiscal cooperation in the WAEMU has reflected a clear aim to ensure that the activity and activity of the internal market are not skewed in national politics (particularly trade and tax) and that the harmonisation of fiscal legislations and convergent fiscal results (niveau and structure of fiscal revenue) have a number of specific and probably conflicting objectives. Article 4 of the WAEMU Treaty refers to these goals. From the point of view of fiscal planning, Article 4(e) is probably the most obvious and the most important. The belief that tax rates and bases will equalize is clear from the use of the term “harmonisation.”

While this may be the purpose of policymakers during the early years of the WAEMU Treaty, a mixture of partial harmonization and cooperation is the current structure primarily. In recent years, the Member States, especially in the field of indirect taxation, have encouraged greater flexibility in the establishment of their tax bases and rates. 

Benefits and Disadvantages

Benefits

It helps countries to raise what taxes they want and does not affect national fiscal control internationally. In order to grant contributions to equalization in the weaker areas, many countries (e.g. Canada) used variations of this method. Few such countries, however, considered that the national consensus on regional redistribution was strong enough to use the same method in deciding the degree to which such transfers would be funded by richer regions.

Indeed, “on a global level, talk of a scheme of coordinated redistribution in a practical way has not yet entered the negotiation table,” as Frankman argued a few years ago. Today it is the same. Frankman attributed this fact in part to ‘…the ongoing stumbling block in a sovereign agreement on granting the income raising authority of supranational bodies’ and went further on to note the need for solving this small problem before ‘financing global order and growth through internatio’ because ‘an overall economy needs a system of global governance.’

Therefore, the outlook for comprehensively redistributive global tax structures is poor. This is no surprise as any continuous, supranational scheme must provide not only net benefits for all member countries as a whole (income from membership less membership costs) but must also be a net benefit for every member if the participation in an essentially voluntary system is to be fair, as Barrett stresses.

Disadvantages

It is hard enough for countries to achieve a durable consensus on inter-jurisdictional sharing within their own borders. It is undoubtedly a much more challenging job around and between countries. However, as mentioned below, it doesn’t mean anything can be done in the near future to change matters surrounding international taxes or the problems of global public goods, which is impossible to be accomplished in future and some people find morally wishful thinking. Like always, we can not deter us from trying to do better, if we cannot reach perfection.

Conclusion

Deploying a tax on the carbon content of fossil fuel, in fact, a form of carbon pricings which acts like environmental charges for the production, distribution or use of fossil fuels, including oil, coal and natural gas, was the largest type of global tax to combat negative externalities. The tax would depend on how much carbon dioxide each fuel is used for operating factories or power stations, for providing heating and electricity to households and industries, driving vehicles etc.

Under this general heading, several types of taxes were discussed: climate change levy, coal tax, sales tax, carbon tax, tax on vehicles. In addition to the significant charges levied on motor fuels for solely fiscal purposes in virtually all countries, it is critical that various types of carbon tax were eventually implemented, as did many of the ‘national’ taxes addressed in this paper in the last few years.

Clearly, significant political challenges remain in the development of how these global issues will be handled due largely to the various distributional impacts within and within countries of corrective policies. Since too many countries, ranging from the richest to the poorest, have been reluctant to step in this direction so far even though there is clear evidence (like cutting subsidies for fossil fuel) of the direct benefits to them of doing so, there are still distant prospects for a sensible global carbon strategy. This took the big smog of 1952 in London to implement the 1956- Clean Air Act, which put an end to the shocked yellow smog that blanketed the capital for decade. At the time at least four thousand people were killed and 100,000 left sick.

Something similar could happen in China now, where there has definitely been a recent attempt to reduce air pollution, at least in part, because national leaders, like many citizens of the capital, like London, enjoy the benefits of bad air.

A short period of time, maybe too long, for sufficient leaders in many countries to act in adequately organized, cohesive ways to deal with carbon emissions, may be short of an equally noticeable and dramatic global crisis. 

Therefore, it is unlikely that the road to success will be simple or fast in this area, as in all global public goods. The response – if any – can arise from a cataclysmic event which will lead to immediate universal agreement, as has just been stated. Alternatively, it can appear as yet another example of the ‘punctuated equilibrium,’ which sometimes seems to characterize evolution of institutions and organisms, from nuanced, partial and long-term decisions in response to various particular questions. As with trade in decades following World War Two – and to a lesser extent with taxes over the century after World War I – the world will proceed, without doubt pain, imperfectly and slowly, to find ways to tackle the global environmental issues before sufficient decision-makers in a sufficient number of countries agree to tackle the problem. The argument is potentially stronger and more important than any other global tax than a regional solution to pollution. However, in some respects the friends of these ideas were just as powerless as such obvious enemies as those who were losing directly because of proposed changes. To demand the immediate implementation of perfect policies in an environment in the history of almost any aim is typically only gradually accomplished is to call for frustration.

It is doubtful that Purists – who for most people are all too eager to risk the immediate well-being of others for the potential future generations to benefit – will win the day before the cumulative (and apparent) proof of the need for change is clear to everyone. In contrast to the immediate and full-hearted implementation of a global ETR, even such a (great) gradual shift in raising subsidies for fossil fuels, for instance, is like saying that taking 2 steps in the right direction is pointless, unless you achieve your objective immediately.

At best, these remarks can recognize that there’s still a long way to go but, in the worst case, can deter us, not least in the chorus of negative voices, undoubtedly created by those who have an interest in these improvements, from even attempting to move in the right direction. However, it will happen, even though it is most difficult to do it somewhere in the world instantly, quickly or evenly.

The case of a carbon tax is not based on a clear need for revenue. However, in fact, the political acceptability of such a levy will depend on whether and how the money is earmarked, e.g. to fund “clean” initiatives or to reimburse households for higher tax costs. Countries should be allowed, as they see fit, to channel their earnings. Taxes that a foreign organization collects and spends seem far lower than taxes that are levied and spent at national level are appropriate. It is fairly difficult to achieve global cooperation with these taxes. Around the same time, it becomes much more difficult to try to make a further effort to transfer funds to other nations.

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