Tax competition, globalization and declining social protection

The decline, or stagnation, in broad-based social expenditure, so crucial to the well being of mother and child, occurs because of various reasons. First, the government may derive less utility from this category of expenditure, compared to spending on its political support group, the military or other prestige projects. Second, the authorities may find that they have less revenue in the era of globalization because of international tax competition, falling domestic tax bases and capital flight. Third, in the interests of macroeconomic stability the government may have to balance its books. This usually means expenditure reduction rather than revenue expansion. In a setting of overall spending cuts, the burden borne by the social sector is often greater than in other areas such as defence. This paper is concerned with aspects of both the revenue and expenditure side in the provision of social services. It demonstrates that small and vulnerable developing can be seriously disadvantaged by international tax competition in mobile factors. This is most applicable to North-South tax competition, as well as competition between larger and smaller nations in the South. The very existence of mobile capital, and the danger of its exit, may induce developing countries in general to lower corporate tax rates below the OECD average. On the expenditure side, policy coherence amongst bilateral and multilateral donors is necessary in the context of the HIPC initiative, which aims to divert debt-servicing to social sector expenditure. It is important that donors move towards greater complementarity in designing aid-conditionality.