Globalisation and the tax challenge

WHY CAPITAL

MOBILITY

FUELS INEQUALITY

Globalisation is not only an economic challenge; it is also a fiscal battleground. It will continue to fall short of its promise as long as a large share of capital keeps escaping taxation while contributing little to growth.

Ioannis Bournakis
Professor in Economics
SKEMA Business School

For four decades, globalisation has powered growth, lifted productivity, and spread new technologies worldwide. But its benefits come with costs: greater vulnerability to shocks, rising inequality, and a tougher job for governments trying to tax fairly. Capital now moves across borders with ease, turning its mobility into a structural challenge for public finances.

In many respects, globalisation has amplified the longstanding asymmetry between labor and capital in modern economies. Workers are tied to places; capital is not. Advances in technology, deregulation of financial markets, and the proliferation of multinational firms mean that capital today can be booked, transferred, or reclassified with a click. Profit-shifting practices, facilitated by global value chains, allow multinational corporations to move income to low-tax jurisdictions while reporting costs in high-tax ones. Countries, in turn, compete with each other by offering favorable tax regimes to attract investment, leading to a global “race to the bottom” in corporate taxation.

The Vicious Cycle of globalisation

The consequences of this dynamic are profound. On the surface, globalisation promised a world where capital would flow to its most productive uses. In practice, however, the fiscal incentives embedded in global tax competition often encourage accumulation of physical capital that contributes relatively little to productivity. Recent academic research on capital taxation shows that capital-intensive firms often enjoy systematically lower effective tax rates compared to labor-intensive ones, even when their actual contribution to total factor productivity is weaker. This means that globalisation does not just erode the revenue base; it distorts incentives in ways that reduce the productivity of capital itself.

The problem is aggravated when one considers how tax avoidance interacts with resource allocation. Firms with the resources and international presence to exploit tax loopholes gain an additional cost advantage over smaller, domestic competitors. This advantage does not stem from superior efficiency or innovation but from regulatory arbitrage. As a result, capital gets locked into activities or structures that are fiscally attractive rather than economically efficient. Instead of boosting innovation and entrepreneurial dynamism, globalisation—through its tax dimension—risks creating “zombie capital,” supported by favorable depreciation allowances, interest deductibility, and accounting strategies that mask underperformance. The costs of globalisation are most visible in its unfair distribution. As capital escapes taxation, the burden shifts to labor and consumption, hitting workers harder. Wealthier households—whose income relies more on capital—benefit from loopholes, while wages stagnate and tax rates rise for everyone else. Governments, starved of revenue, have less to spend on schools, healthcare, and social support. This weakens their ability to tackle inequality, fueling public discontent and, in turn, mistrust of globalisation itself.

The phenomenon of “slowbalisation,” often described as the plateauing of global integration. Since the financial crisis of 2007–08, skepticism about globalisation has increased, and more recently, the return of the US to trade protectionism has intensified these concerns. But is the answer to these concerns a renewed wave of protectionism and a mercantilist approach in the 21st century, or should we instead seek effective solutions within a policy toolkit aimed at redesigning the fiscal architecture that governs global capital flows?

Legitimacy at Stake

Several international initiatives point in this direction. The OECD’s Base Erosion and Profit Shifting (BEPS) project and the more recent global minimum tax agreement, for instance. Obviously, these approaches are not enough. A more internationally coordinated framework is needed to close loopholes, prevent harmful tax competition, and ensure that multinational corporations pay taxes where they create value. But reforms must go beyond headline corporate tax rates. They should also address the alignment between fiscal incentives and productivity, for example by rewarding labor-augmenting innovation and R&D activities rather than blanket capital accumulation.

Equally important is the need to rethink how governments benchmark performance and fairness in taxation. Distinguishing between productive capacity and actual output—an approach that integrates inefficiency into performance measurement—offers one promising avenue. This distinction matters because it highlights cases where capital is protected by fiscal privileges despite delivering little in terms of real efficiency gains. By incorporating measures of inefficiency into tax policy design, governments can better target incentives toward genuinely productive investments.

For developed economies in particular, the stakes are high. Sluggish productivity growth and widening inequality have become defining features of the post-crisis era. If capital continues to escape taxation while contributing less to growth, per capita incomes will stagnate, and social tensions will rise. Globalisation, in this sense, is not just an economic challenge but a fiscal and social one. Ensuring that globalisation works for the many, not the few, requires embedding fair and efficient taxation at the core of the international economic system. Unless we reconcile mobility of capital with the principles of equity and efficiency, the promise of globalisation will remain unfulfilled.