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Why countries should tax global income

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10.12.2019
By Ricardo Hausmann

CAMBRIDGE ― If you are a citizen of a country, should you pay taxes on the income you earn only within that country's geographical limits, or on all the money you earn, independently of where? The United States, Mexico, India, China, and Chile tax global income.

Western Europe, Japan, Canada, Peru and Colombia tax territorial income. If the world moved toward global taxation and enhanced some incipient information-sharing mechanisms, the impact on inclusive growth, especially in the developing world, would be very positive.

Who should pay for government and how is an issue at the heart of any political system. The answer combines both social preferences and efficiency considerations, although the former often masquerade as the latter.

In most polities, people prefer to tax the rich more heavily than the poor, U.K. Prime Minister Margaret Thatcher's poll tax of the late 1980s being the exception that proves the rule. Thatcher was ousted by her own Conservative Party in November 1990, after she tried to tax everybody the same.

By contrast, efficiency considerations suggest that taxes should be levied on things that are hard to move or change in response to tax. For example, land is hard to move, but a municipal tax on gasoline can be avoided by filling up the tank in a nearby jurisdiction that does not tax fuel. Competition between municipalities would create a race to the bottom that would have them tax gasoline at close to zero.

The fact that tax bases can move more easily across municipal borders than across international borders is one reason why many taxes are imposed and collected by national governments and shared with state and local authorities.

Should we tax labor or........

© The Korea Times