Working Paper: NBER ID: w26201
Authors: Assaf Razin; Efraim Sadka; Alexander Horst 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:\n(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. \nWe 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.
Keywords: globalization; welfare state; income distribution; tax competition; political economy
JEL Codes: F0; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| globalization (F60) | welfare state (I38) |
| globalization (F60) | income distribution (D31) |
| globalization (F60) | international tax competition (H26) |
| international tax competition (H26) | restructuring of the welfare state (I38) |
| welfare state (I38) | trade openness (F43) |
| welfare state (I38) | financial openness (F30) |
| globalization (F60) | generosity of the welfare state (I38) |
| welfare state (I38) | gains from globalization (F69) |