Globalization and Tax Competition: Implications for Developing Countries

The current age of globalization can be distinguished from the previous one by the much higher mobility of capital than labor. The mobility of capital has led to tax competition, in which sovereign countries lower their tax rates on income earned by foreigners within their borders in order to attract both portfolio and direct investment. Tax competition, in turn, threatens to undermine the individual and corporate income taxes, which remain major sources of revenue for all modern states. This paper argues that if government service programs are to be maintained in the face of globalization, it is necessary to cut the intermediate link by limiting tax competition.