Did the Competition State Rise? Globalization, International Tax Competition, and National Welfare

Abstract

Does economic globalization erase domestic policy autonomy? Globalization theorists argue that it does, globalization-skeptics counter that it doesn’t. Reality, of course, is more nuanced. Analyzing tax policy in three country groups – OECD member states, tax havens, and least developed countries – we show that the process of economic integration has indeed constrained national policy autonomy as assumed by globalization theory. Across all three country groups, governments have adjusted – to varying degrees – to international tax competition by de-taxing capital. However, in contrast to globalization theory, we find that tax competition has ambiguous effects on welfare state capacity, lowering it in big and poorly governed countries, yet increasing it in small, well-governed ones. Finally, we show that the group of OECD member states is least affected by tax competition. The main beneficiaries and victims of economic globalization are non-OECD countries.