Thread by @phdskat

Does globalization necessitate lower income tax rates?

A fascinating new @IMFnews paper looks at this exact question. THREAD:

imf.org/~/media/Files/…

1) The paper takes up a puzzle that has permeated much research on taxation in the 'globalization' era:

The increasingly free-flowing, transnational nature of capital

- vs. -

the largely national space of tax regulation and enforcement.

2) This contrast, it is generally argued, has meant countries lower their tax rates on mobile capital (corporations, rich people), engaging in 'tax competition' or 'the race to the bottom', or else that capital simply moves elsewhere.

3) In the 'local language', if you will, the elasticities of taxable income was said to increase with globalization, prompting the revenue-maximising tax rate to drop.

4) This paper tries to empirically test whether this proposition is, in fact, true.

It estimates tax elasticities of top income earners from 1981-2016 across 35 OECD countries.

5) In short, there doesn't seem to be a downward trend in top income earners' tax elasticity during the 'globalization' era.

In others words: In response to (higher) tax rates, rich people don't seem more likely to move their money elsewhere today than they were in the 1980s.

6) Now, we should certainly be cautious about universal inferences and interpretations of the results, but there is also some supporting evidence elsewhere.

7) First, recent research has shown that 'mobile' capital may not be as mobile as previously assumed. @cristobalyoung5's work is an excellent example. And there's critical studies on corporate income taxes, incl. work by @KClausing, which I discussed here: phdskat.org/2016/08/18/dis…

8) Second, in all likelihood these elasticities are actively being reconfigured (reduced) as a result of tax policy changes in the last decade.

#BEPS, FATCA, CRS, etc. - they all make it harder for capital to 'escape', thus "changing the equation":

phdskat.org/2016/07/24/cha…

9) So, what are the implications of these insights?

They hint, I think, at some very pertinent points about economics and politics:

10) First, if tax elasticities haven't risen but income tax rates have decreased, top tax rates may be far lower than they 'should'.

In fact, the authors estimate that EVERY SINGLE COUNTRY in the model are below the revenue-maximizing optimal tax rates.

11) Second, if top income tax rates have decreased beyond revenue-optimal levels, it's likely POLITICS has played a central role. The authors investigate:

Could it be because citizens prefer less redistribution today? Well.. WVS shows the exact opposite trend.

12) If not citizen preferences, then we could think of a range of other POLITICAL factors, such as:

- The structural power of elites and corporations (lobbying, policy power, etc.)
- The rise of inequality, exacerbating this structural power
...

13) It could also be about the political power of economists, favouring lower income rates, potentially based on arguable assumptions and models.

I'm sure you can think of other political factors, too.

14) The upshot, I think, is that we really need to understand the politics and the political economy of taxation (a homer comment, I know), because it's so important to these debates and to societies more broadly.

/end