Working Paper: CEPR ID: DP12998
Authors: Assaf Razin; Efraim Sadka
Abstract: There is strong evidence from the launch of the single financial market in Europe on the interactions among financial globalization, international tax competition, and the fading generosity of the welfare state. Financial globalization triggers a race-to-the bottom tax competition. The tax race generates an international re-allocation of capital that further chips away at the domestic tax base, and drives a downscaling of scope and size of redistribution. To understand the working of key mechanism which links financial globalization to redistribution policy, this paper develops a stripped-down model, where easing the country access to the world capital markets induces political-economy based policy changes that impact income inequality. We demonstrate in the paper the crucial role of the welfare state in guaranteeing that the gains from trade from financial globalization spread out to all.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial globalization (F65) | tax competition (H26) |
| tax competition (H26) | domestic tax base (H24) |
| domestic tax base (H24) | redistribution policies (H23) |
| Financial globalization (F65) | domestic capital (F21) |
| Financial globalization (F65) | rate of return on capital (G31) |
| Financial globalization (F65) | wage rate (J31) |
| domestic capital (F21) | total tax burden (H22) |
| total tax burden (H22) | social benefits per capita (I31) |
| Financial globalization (F65) | income inequality (D31) |