Working Paper: NBER ID: w31399
Authors: Pol Antràs; Gerard Padró i Miquel
Abstract: We present an economic rationale for countries resorting to foreign influence to export their ideology to other nations. Our model incorporates two fundamental elements: redistribution of the tax burden between capital owners and workers, and international capital mobility. The model highlights the role of ideology in shaping both the taxes implemented by governments and the cross-border externalities of these policy choices. Pro-capital governments set lower capital taxes than pro-labor governments. Importantly, pro-capital governments benefit from other countries setting low capital taxes, while pro-labor governments' efforts to shift the tax burden onto capital owners are facilitated by higher capital taxes abroad. These cross-border externalities create strong incentives for engaging in foreign influence activities. We solve for a political equilibrium in which incumbent governments may exert costly actions that probabilistically affect the electoral outcome in other countries. In equilibrium, pro-capital parties exert influence aimed at promoting pro-capital parties and policies worldwide, while pro-labor governments carry out foreign influence activities aimed at boosting pro-labor parties and policies in other countries.
Keywords: foreign influence; ideology; tax competition; political equilibrium; international relations
JEL Codes: D7; F2; H77; P33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government ideology (P16) | foreign influence strategies (F23) |
| capital mobility + redistribution of tax burden (H23) | ideological affinity between governments (P16) |
| pro-capital government (P16) | low capital taxes abroad (F21) |
| pro-labor government (J58) | high capital taxes abroad (F38) |
| low capital taxes abroad (F21) | pro-capital government benefits (P16) |
| high capital taxes abroad (F38) | pro-labor government benefits (J58) |
| ideological alignment of governments (P16) | economic interests (E25) |
| political equilibrium (D50) | costly foreign influence activities (F23) |
| costly foreign influence activities (F23) | electoral outcomes (K16) |