Globalization,Tax Distortions,and Public‐Sector Retrenchment* |
| |
Authors: | Torben M Andersen Allan Sørensen |
| |
Institution: | 1. Aarhus University, DK‐8000 Aarhus, Denmark tandersen@econ.au.dk;2. Aarhus University, DK‐8210 Aarhus, Denmark allans@asb.dk |
| |
Abstract: | It is widely perceived that globalization inevitably leads to a retrenchment of tax‐financed public‐sector activities. The argument is that tax distortions increase when production is more easily relocated across countries (the elasticity argument). We question this perception in a model that captures standard mechanisms from trade and open‐economy models. Importantly, the retrenchment argument overlooks the fact that the basic effect of integration (i.e., gains from trade) tends to lower the marginal costs of public funds. Moreover, the elasticity argument is not unambiguously supported, and there is no race to the bottom as a result of the perceived terms‐of‐trade effects of non‐cooperative fiscal policies. |
| |
Keywords: | Labor taxation marginal costs of public funds open economy policy spillover F1 H2 J22 |
|
|