Working Paper: CEPR ID: DP13937
Authors: Assaf Razin; Efraim Sadka; Alexander Schwemmer
Abstract: Globalization radically changes income distribution and triggers intense international tax competition. Therefore, globalization entails an extensive restructuring of the welfare state. We analyze a parsimonious model of an open economy, in its trade and finance transactions with the rest of the world, governed by voter-majority-controlled welfare state. We analyze the interactions between taxation, provision of social benefits, and globalization. We demonstrate how these interactions are grounded on trade-related and macro-related fundamentals, familiar from a standard open-economy model:(i) Degree of trade border frictions, (ii) Degree of international finance frictions, (iii) Relative factor abundance that determines the capital intensity of the country’s exports; and, (iv) Domestic savings and productivity of domestic investment, which determines whether the country is a financial capital exporter or importer.We address the issues of whether the welfare state enhances (or inhibits) the trade and financial openness driven by diminished border effects; whether globalization chips away at the generosity of the welfare state; and, whether the welfare state efficiently spreads out the gains from globalization from winners to losers.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| globalization (F60) | income distribution (D31) |
| globalization (F60) | international tax competition (H26) |
| international tax competition (H26) | restructuring of welfare state (I38) |
| trade and financial integration (F15) | lower taxes on mobile factors (F29) |
| lower taxes on mobile factors (F29) | eroded tax bases linked to capital income and high-skill labor (H31) |
| border frictions (F55) | welfare state support or undermine openness (P16) |
| globalization (F60) | reduce generosity of welfare state (H53) |
| higher initial social expenditures (H53) | lower social benefits post-globalization (F69) |
| welfare state (I38) | redistributing gains from globalization (F62) |