11-2-3-globalisation-and-deregulation

Growth of Low Tax Regime States

• Globalisation has encouraged the growth of states that have low-tax regimes which provide (tax) havens for the profits for Trans National Corporations (TNCs) and homes for wealthy expatriates

• A way for countries to encourage more foreign direct investment (FDI) is to reduce restrictions on who can invest

• This allows for freer movement of money and encourages TNCs to move parts or all of their operations to those countries with lower tax rates

• Some nations offer low or zero tax regimes, which provides a shelter from government taxation, called a ‘tax haven’ 

• Low tax regimes are often associated with higher income inequality and lower public spending on social services and infrastructure. Nations may struggle to raise sufficient revenue for government priorities, especially in LDEs

• Some examples of low tax regime states are:

  • Ireland, which has a corporate tax rate of 12.5%, compared to the United Kingdom, which has a corporate tax rate of 19%. This has attracted over £180 billions of FDI from the US

  • Luxembourg allows companies to save millions in tax payments on profits earned in other countries. This has resulted in more than 40,000 TNCs locating ‘holding companies’ to Luxembourg to benefit from this tax break

  • The Cayman Islands is the most well-known nation for being a tax haven. They offer 0% personal tax rate and very low business taxes. As of 2022 116,996 companies were registered on the island, of which, just under 600 are banks and trust companies and include 43 of the 50 largest investment banks in the world

Acceptance of Tax Havens

• Most governments and Inter-Governmental Organisations (IGOs) have accepted the emergence of tax-havens although many Non-Governmental Organisations (NGOs) have raised objections

• This is because tax havens offer a way of avoiding paying tax, but also reduces investment in LDEs and encourages corruption

• Tax avoidance uses legal loopholes to reduce a company’s or personal tax bill

• Different methods of tax avoidance offered by tax havens include:

  • Corporate profit-shifting – where a TNC’s headquarters is located in a low-tax country and therefore, profits are registered there

  • Wealthy people can move to a tax haven and live there or if they wish to remain in their home country, they can invest their money in a trust in a tax haven

Advantages and Disadvantages of Tax Havens

Growing Global Inequalities & Economic Sustainability

• Growing global inequalities have been recognised as a major threat to the sustainability of the global economic system

• In 2021, Oxfam found that just 10 of the richest men in the world owned more than the combined wealth of the bottom 3.1 billion people, almost half of the entire world population

• Some of the consequences of inequality are:

  • Economic instability – less equal societies have fewer stable economies and are more prone to financial crisis, debt and inflation. Higher inequality is also associated with low-pay, low-skilled jobs with no prospects

  • Poor health – living in an unequal society causes stress and anxiety, leading to mental health issues, shorter life expectancy, and higher rates of infant mortality

  • Crime and violence – inequality increases property and violent crime

  • Low social mobility and education – inequality leads to lower social mobility and education. Those born into poverty often find it very difficult to escape from it – a cycle of poverty

  • Trust, participation, and happiness – people in less equal societies are less likely to trust each other, less likely to engage in social or civic participation, and less likely to say they’re happy

  • Political instability – inequality increases rejection of the established political classes who are seen as the rich elite. This further threatens economic stability of the country

Gini coefficient

• The Gini coefficient is a statistical measure in analysing income distribution within a nation or a social group

• It is measured on a scale of 0 – 100, with 100 being the highest inequality

• The Gini index uses the same data, but the scale is 0 – 1, where 0 reflects perfect equality, while 1 (or 100%) reflects maximum inequality

• Usually, higher wealth inequality is seen within HDEs because of the range of wages available

Alternatives – Bolivia

• With the rise in inequality, some governments have promoted alternative models

• Bolivia introduced a number of policies to reduce inequalities within its borders

• Bolivia has a mixed economic system that include private companies along with a centralised economic planning and government policy

• Policies have included:

  • Nationalisation of oil and resources – this ensures that revenues go to the government and not private owners, TNCs and shareholders

  • Low-energy promotion – through advocating a reduction in the use of resources, economic growth has been consistent rather than rapid

  • Subsidies – reductions on costs through subsidies ensures the poorer citizens of Bolivia can afford to buy food

  • Imports – reduction in overseas imports through promotion of Bolivian production

Impact of Bolivian policies

• Inequality has reduced from 61.6 in 2000 to 40.9 in 2021 

• Millions of Bolivians have been lifted out of poverty

• Import substitution has boosted the economy – growth is 3.1%

• Since 2006, Bolivia’s GDP has grown at double the rate for Latin America

• However, its per person GDP remains one of the lowest in South America at $3800 compared to Uruguay at $21,677

• Whilst Bolivia has rejected a western economic model, the nation’s budgets rely on global oil and gas prices