Globalization, Public Finance, and Poverty

Abstract

Global economic forces might impact poverty in any number of direct ways—by reducing prices, providing access to larger pools of capital, or creating and destroying jobs. Such forces might also work indirectly, that is, through their effect on labor standards, unionization rates, or the development of labor-saving technology. In this research note, we emphasize the impact of “globalization” on the poor via the path of public finances. This is a topic that has received considerable attention from social scientists and particularly political scientists, who have suggested that global trade or finance has led to a reduction in corporate tax rates and receipts (Cao 2010; Jensen and Lindstadt 2012), a concomitant increase in consumption taxes (Wibbels and Arce 2003; Beramendi and Rueda 2007), and reductions in welfare spending. Though the findings might vary across the developed and developing worlds, the basic idea is that global economic forces are bad for the poor to the extent they constrain the progressivity of taxation and/or public spending. Despite the huge volume of research on the link between globalization and public finance, identifying causal effects running from the former to the latter is incredibly challenging. As Nielson (2015) notes in his piece in this forum, there are important opportunities on the research design side to expand on what we know. Here, we discuss some of the common data limitations that plague research in this area. We argue that there are two profound limitations on what we know: first, the reliance on standard cross-national public finance sources has elided broad budget categories with the actual incidence of taxing and spending across the income distribution; and second, almost no research has considered tax expenditures, which represent a black box in our knowledge of public finances. Indeed, just as Malesky's (2015) companion piece in this forum emphasizes how …