How Does Globalization Affect the Implicit Tax Rates on Labor Income, Capital Income, and Consumption in the European Union?

Article excerpt

I. INTRODUCTION

This article analyzes the effects of globalization on the taxation of labor income, capital income, and consumption in the EU Member States. The theory of capital tax competition argues that, as capital becomes increasingly more mobile, firms are able to avoid high taxes by choosing countries with a low capital tax burden, which may result in inefficiently low taxes on capital income and inefficiently low public good provision (Brueckner 2000; Bucovetsky 1991; Krogstrup 2004; Oates 1972; Tanzi 1995; Wilson 1999; Zodrow and Mieszkowski 1986). However, fewer possibilities to tax mobile capital also implies that more immobile tax bases, notably labor income and consumption, should bear the tax burden necessary to finance a given level of public expenditures.

Indeed, an already extensive empirical literature is available which explores the impact of globalization on the level of the capital income tax burden as well as the tax burden on more immobile tax bases. In this literature, five different measures of tax burden are used: (1) statutory tax rates (STRs) on corporate income, (2) corporate income tax revenues as a percentage of GDP (gross domestic product) or total tax revenues, (3) implicit tax rates (ITR) (1) on capital income, corporate income, labor income, and on consumption expenditures of the Mendoza, Razin, and Tesar (1994) type, and (4 and 5) effective marginal and average tax rates on corporate income (EMTR and EATR) of the Devereux and Griffith (1998) type.

Studies that test the effect of globalization on the level of STR or EATR (see Clausing 2007; Slemrod 2004; Swank and Steinmo 2002 on STR, and Dreher 2006a; Garretsen and Peeters 2007; Krogstrup 2005; Loretz 2008 on EATR) generally find a negative effect. Yet, the empirical results on the effects on the ITR on capital income are inconclusive: Dreher, Gaston, and Martens (2008), Swank and Steinmo (2002), and Swank (2006) find no effect; Dreher (2006a) estimates a positive effect, whereas Winner (2005) finds a negative effect. Using the ITR on corporate income, Adam and Kammas (2007), Bretschger (2008), and Bretschger and Hettich (2002) also find a negative effect of globalization. Moreover, Quinn (1997) finds a positive effect on corporate tax revenues as a percentage of GDP and total revenues.

Concerning the ITR on labor income, Adam and Kammas (2007), Winner (2005), and Dreher, Gaston, and Martens (2008) find a positive effect of globalization. However, Dreher (2006a) finds no effect, whereas Swank and Steinmo (2002) find a negative effect. Furthermore, Bretschger and Hettich (2002) explore the globalization impact on the ratio of the ITR on labor income to that on corporate income. They find a positive relationship which signals that the tax burden is shifted to labor income. Similarly Winner (2005) and Adam and Kammas (2007) find a shift from capital to labor income taxation. Regarding the globalization effects on the ITR on consumption, the picture is more conclusive as most available studies find no effect (e.g., Dreher 2006a; Dreher, Gaston, and Martens 2008; Swank and Steinmo 2002).

Concerning tax law-based tax measures (EA TR, EMTR, STR), the empirical evidence available so far points toward a negative relationship with globalization. Yet, notable features of the existing literature are that these studies (1) are predominantly based on a sample of advanced Organization for Economic Cooperation and Development (OECD) countries and (2) do not separate the globalization effects by welfare regimes or country groups.

This article adds to the literature by exploring the differences in globalization effects across welfare regimes within the EU15 based on an "augmented" Esping-Andersen typology. We also distinguish between countries that have tax rates higher than average compared to those with a lower tax rate. (2) A second novelty of this article lies in including the Central and Eastern European New Eastern European Members States (CEE NMS) in the country sample and, thus, by focusing on differences in globalization effects between western countries (EU15) and CEE NMS. …