The damaging effect of an unhealthy completion in global tax system has been a consequence of globalization and capital mobility with a view to attracting investment (Reint&Kristina, 2001). The mode of taxing multinationals can pose a lot of problem to the fiscal authorities and this could lead to difficulty in the pattern of trade and investments. Multinationals can help in relieving themselves of the burden of the tax by simply appropriately relocating capital.
There can be redirection of tax weight from the more mobile to more static variables like labor or in the same vein from a giant multinational to a smaller one . The extent to which such large multinational can go in minimizing the liability on the tax or avoid it is prognostic for national fiscal system involving a more or less regressive tax method with acquisition of a higher deficit in budget and a reduction in the services to the populace.
It has always been a controversial issue when it comes to the question of what the federal government should use as the ideal tax rate . It has also been a subject of discussion in the political cycles the question of at exactly what tax rate investment, revenues and productivity should be at the maximum. Some economic theories have given different explanation on the management of the economy. Low tax system has been proven to prop up growth of the economy and can be beneficial to both the government and the industrial sector of the economy.
It boosts revenue returns also. A curve known as the Laffer curve has been used in predicting at what tax rate the government and the investors would both benefit and it shows that there is a direct relationship between the taxes being paid and the revenue accrued to the government i. e. at increasing tax rate, there is also a corresponding increase in the tax revenue until a point is reached at which the increasing tax is so high that investors would seize to work and this would subsequently lead to reduction in the income and ultimately a fall in the tax revenue.
Lower tax rate could ginger investors towards hard work and industry as the employers of labor work harder and there is subsequent increase in the tax revenue despite the low taxation rate. The high after-tax in the low tax system serves as premise to encouraging business investors. The outrageous tax system only makes the rich get richer and the poor poorer as it gives room for luxury and ostentation and this is against the spirit of an egalitarian society.
It leads to reduction in assets, unemployment and revenue loss. It also leads to tax sheltering. Lower tax rates produce financial rewards to businesses and generates higher profit rates . it has been shown that there is a multidimensional trend in the responses of corporations in the global economy. Countries with high tax rate policy and therefore high pretax index for the executions of new investment have a fixed after tax and this is the trend across most countries.