Robert T. Kudrle
A voluminous literature now considers how much the power of the nation-state has been altered by the various processes known as globalization. One claim has especially alarmed thoughtful observers: external forces are eroding the capacity of the state to tax and spend as its own citizens wish and, in particular, to redistribute income. Fiscal competition may lead to a "race to the bottom" (e.g. Lawrence, Bressand and Ito, 1996:31; Frenkel, Razin and Sadka, 1991:213-14).
Given certain assumptions, the logic is impeccable. Where factors of production (capital or labor) can earn more by crossing borders and they are free to do so, economic logic suggest that they will, all else equal. Of course, this is only loosely connected with the migration of particular businesses, for which the cost of capital cost or the taxation of firm profits only partially determines location. Moreover, individuals offering their labor services will not immediately abandon a familiar environment and web of social connections simply to earn higher material rewards elsewhere. But the incentives are clear. This dynamic implies that, as mobility increases, internationally out-of-step attempts to redistribute income to lower earners within the current nation-state would increasingly result in their literal abandonment as both capital and higher earners seek after-tax returns closer to their before-tax productivity by moving to other jurisdictions. In such circumstances states can also be expected to set their minimum levels of social support with some regard for the immigration of persons who are likely to be net drain on the fiscal system.
Some version of the capital and skilled labor mobility story prevails in most current discussions of the national fiscal implications of market globalization. But there is another. It begins with the recognition that all income from every source has individual claimants and that every person resides in one or more jurisdiction. The earnings from capital anywhere in the world