The Effect of Globalization on the Distribution of Taxes and Social Expenditures in Europe: Do Welfare State Regimes Matter?

Abstract

Europe. It tests the coexistence of efficiency and compensation effects of globalization on the expenditure as well as the revenue sides of government budgets. In Western Europe, globalization leads to an increase in social expenditures; however these expenditures are to an increasing extent financed by taxes on labor income. There is no effect of the ITR on capital income, whereas the ITR on consumption decreases. There are important differences between the welfare states. In the conservative regimes, social expenditures increase due to globalization, but they are financed to an increasing extent by taxes on labor. In the social democratic regimes, not only social expenditures, but also the ITRs on capital income and consumption decrease as a result of globalization, whereas the ITR on labor income increases. In the liberal regimes, the ITR on labor income is rising, while social expenditures and the ITR on consumption is declining. In the southern regimes, the ITRs on both capital income and consumption are decreasing. In the CEE NMS, on average, there seems to be no statistically significant effect of globalization on social expenditures nor on the ITR on capital and labor income. Globalization affects only the ITR on consumption, leading to a decline. However, different welfare regimes react differently: there is a negative effect of globalization on social spending in the Baltic countries, and a negative effect on the ITR on capital income in the post-communist European regimes.

The Evidence on Globalisation

“…Both approaches show that, in CEE NMS, globalisation was not correlated with ITRs on labour and negatively correlated with ITRs on consumption. Globalisation was somewhat positively correlated with ITRs on capital in CEE NMS (Onaran and Boesch, ). Onaran and Boesch () distinguish among the CEE NMS between ‘post‐communist European type’ and ‘Baltic type’ countries and concluded that there is no negative association between globalisation and ITRs on consumption in the Baltic type countries.…”

“…Globalisation was somewhat positively correlated with ITRs on capital in CEE NMS (Onaran and Boesch, ). Onaran and Boesch () distinguish among the CEE NMS between ‘post‐communist European type’ and ‘Baltic type’ countries and concluded that there is no negative association between globalisation and ITRs on consumption in the Baltic type countries. Because the authors do not compute a marginal effect of globalisation for the Baltic type countries, we do, however, not know whether the marginal effect of globalisation in the Baltic countries is negative and statistically significant.…”

“…The results show evidence in favour of the compensation hypothesis in conservative welfare state regimes and evidence for the efficiency hypothesis in social democratic welfare state regimes. Onaran and Boesch () include the globalisation variable in levels and exclude one of the interaction terms between globalisation and the welfare state regime dummies as reference category. The baseline results (not including interaction terms) show that economic globalisation was positively correlated with social expenditures (as a share of total expenditures) in the EU‐15 countries over the period 1970–2007.…”

OECD Economics Department Working Papers

“…For example, most recently Egger et al (2016), Tanninen et al (2017); earlier studies include Kwon and Pontusson (2010), Lupu andPontusson (2011), Meinhard andPotrafke (2012), Dreher (2005), Rodrik (1998), Onaran and Boesch (2014), Gemmel et al (2008). See also Potrafke (2009) for a study on the effect of globalisation on partisan politics.…”

An empirical investigation on the drivers of income redistribution across OECD countries

“…31 See Potrafke (2015) for a recent survey. For example, most recently Egger et al (2016), Tanninen et al (2017); earlier studies include Kwon and Pontusson (2010), Lupu andPontusson (2011), Meinhard andPotrafke (2012), Dreher (2005), Rodrik (1998), Onaran and Boesch (2014), Gemmel et al (2008). See also Potrafke (2009) for a study on the effect of globalisation on partisan politics.…”