Globalization, Tax Competition, and the Welfare State

TLDR

Globalization’s impact on the welfare state’s fiscal base is debated, with some observers citing OECD data that show no decline in tax levels to argue that tax competition is not a serious threat. The study demonstrates that tax competition severely limits national tax autonomy, hindering governments’ ability to raise taxes for increased spending and to reduce labor taxes amid rising unemployment.

Abstract

Does globalization undermine the fiscal basis of the welfare state? Some observers are not convinced. They claim that aggregate data on Organization for Economic Cooperation and Development countries show no drop in tax levels and conclude from this that tax competition is not a serious challenge for the welfare state. This conclusion is unwarranted. The article shows that tax competition systematically constrains national tax autonomy in a serious way. It prevents governments from raising taxes in response to rising spending requirements and from detaxing labor in response to growing unemployment.