Globalization, Tax Distortions, and Public‐Sector Retrenchment

31 Pages Posted: 16 May 2012

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Allan Sørensen

Aarhus University

Date Written: June 2012

Abstract

It is widely perceived that globalization inevitably leads to a retrenchment of tax‐financed public‐sector activities. The argument is that tax distortions increase when production is more easily relocated across countries (the elasticity argument). We question this perception in a model that captures standard mechanisms from trade and open‐economy models. Importantly, the retrenchment argument overlooks the fact that the basic effect of integration (i.e., gains from trade) tends to lower the marginal costs of public funds. Moreover, the elasticity argument is not unambiguously supported, and there is no race to the bottom as a result of the perceived terms‐of‐trade effects of non‐cooperative fiscal policies.

Keywords: Labor taxation, marginal costs of public funds, open economy, policy spillover

JEL Classification: F1, H2, J22

Suggested Citation

Andersen, Torben M. and Sørensen, Allan, Globalization, Tax Distortions, and Public‐Sector Retrenchment (June 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 2, pp. 409-439, 2012, Available at SSRN: https://ssrn.com/abstract=2060772 or http://dx.doi.org/10.1111/j.1467-9442.2011.01689.x

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

University Park
Building 322
DK-8000 Aarhus C
Denmark
+45 8 942 1609 (Phone)
+45 8 613 6334 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Allan Sørensen

Aarhus University ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
383
PlumX Metrics