Working Paper: CEPR ID: DP14137
Authors: Raphael Espinoza; Jonathan D. Ostry; Xiaoxiao Zhang
Abstract: This paper investigates how trade and financial globalization affect government decisions toredistribute via spending and taxation, using a large panel covering around 100 democratic countriesover the period 1970-2015. We use a time-varying external instrument in regressions with fixed andtime effects in order to overcome endogeneity concerns that have plagued the earlier literature. Ourfindings support the view that more open economies have bigger governments. The paper also examinesthe impact of globalization on different types of social spending and taxes. We find that trade opennessincreases the tax burden on labor income and reduces the tax burden on capital income and that financialopenness reduces corporate income tax rates. In addition, exposure to trade pushes governments tospend more on labor programs and family benefits. Finally, the paper does not find that politicalinstitutions affect the sensitivity of public spending to globalization.
Keywords: Trade Openness; Government Size; Redistribution; Financial Liberalization
JEL Codes: H11; H53; F68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade openness (F43) | tax burden on labor income (H31) |
| Trade openness (F43) | tax burden on capital income (H24) |
| Trade openness (F43) | size of government (H11) |
| Financial openness (F30) | corporate income tax rates (K34) |
| Exposure to trade (F19) | government spending on labor programs and family benefits (J32) |