Back
 ME  Vol.4 No.10 A , October 2013
Economic Integration, Tax Erosion, and Decentralisation: An Empirical Analysis
Abstract: This paper addresses the issues of whether and how economic integration can affect the ability of the central governments to raise tax revenues and lead to a greater decentralisation of the public sector. To this purpose, a country-specific measure of tax erosion is derived. That is used as a determinant of the degree of fiscal federalism. We find that an increase of economic integration causes a decline of the implicit tax rates on mobile capital and the process of tax erosion positively contributes to the growth of public sector decentralisation.  
Cite this paper: F. Gastaldi, P. Liberati and A. Scialà, "Economic Integration, Tax Erosion, and Decentralisation: An Empirical Analysis," Modern Economy, Vol. 4 No. 10, 2013, pp. 14-26. doi: 10.4236/me.2013.410A003.
References

[1]   I. Grunberg, “Double Jeopardy: Globalization, Liberalization and the Fiscal Squeeze,” World Development, Vol. 26, No. 4, 1998, pp. 591-605.
http://dx.doi.org/10.1016/S0305-750X(97)10068-7

[2]   G. Schulze and H. W. Ursprung, “Globalization of the Economy and the Nation State,” The World Economy, Vol. 22, No. 3, 1999, pp. 295-352.
http://dx.doi.org/10.1111/1467-9701.00205

[3]   J. Stiglitz, “Globalization and the Economic Role of the State in the New Millennium,” Industrial and Corporate Change, Vol. 12, No. 1, 2003, pp. 3-26.
http://dx.doi.org/10.1093/icc/12.1.3

[4]   D. Stegarescu, “The Effects of Economic and Political Integration on Fiscal Decentralization: Evidence from OECD countries,” Canadian Journal of Economics, Vol. 42, No. 2, 2009, pp. 694-718.
http://dx.doi.org/10.1111/j.1540-5982.2009.01524.x

[5]   P. Liberati and A. Scialà, “How Economic Integration Affects the Vertical Structure of Public Sector,” Economics of Governance, Vol. 12, No. 4, 2011, pp. 385-402.
http://dx.doi.org/10.1007/s10101-011-0097-z

[6]   E. G. Mendoza, A. Razin and L. L. Tesar, “Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption,” NBER Working Paper 4864, 1994.

[7]   F. Gastaldi, “Globalisation, Capital Mobility and Convergence of Effective Tax Rates,” CRISS Working Paper, No. 32, 2008.

[8]   F. Gastaldi and P. Liberati, “Economic Integration and Government Size: a Review of the Empirical Literature,” Financial Theory and Practice, Vol. 35, No. 3, 2011, pp. 327-384.

[9]   S. Bucovetsky and J. Wilson, “Tax Competition with Two Tax Instruments,” Regional Science and Urban Economics, Vol. 21, No. 3, 1991, pp. 333-350.
http://dx.doi.org/10.1016/0166-0462(91)90062-R

[10]   V. Tanzi, “Taxation in an Integrating World,” Brookings Institutions, Washington DC, 1995.

[11]   V. Tanzi, “Globalization and the Future of Social Protection,” Scottish Journal of Political Economy, Vol. 49, No. 1, 2002, pp. 116-127.
http://dx.doi.org/10.1111/1467-9485.00224

[12]   D. R. Lee and R. B. McKenzie, “The International Political Economy of Declining Tax Rates,” National Tax Journal, Vol. 42, No. 1, 1989, pp. 79-83.

[13]   P. Kurzer, “Business and Banking: Political Change and Economic Integration in Western Europe,” Cornell University Press, Ithaca, 1993.

[14]   S. Steinmo, “The End of Redistribution? International Pressures and Domestic Tax Policy Choices,” Challenge, Vol. 37, No. 6, 1994, pp. 9-18.

[15]   G. Brennan and J. Buchanan, “The Power to Tax: Analytical Foundations of a Fiscal Constitution,” Cambridge University Press, Cambridge, 1980.

[16]   D. Swank, “Global Capital, Political Institutions and Policy Change in Developed Welfare States,” Cambridge University Press, Cambridge, 2002.
http://dx.doi.org/10.1017/CBO9780511613371

[17]   A. Razin and E. Sadka, “Efficient Investment Incentives in the Presence of Capital Flight,” Journal of International Economics, Vol. 31, No. 1-2, 1991, pp. 171-181.
http://dx.doi.org/10.1016/0022-1996(91)90062-B

[18]   R. H. Gordon, “Can Capital Income Taxes Survive in Open Economies?” Journal of Finance, Vol. 47, No. 3, 1992, pp. 1159-1180.
http://dx.doi.org/10.1111/j.1540-6261.1992.tb04009.x

[19]   D. Rodrik, “Why Do More Open Economies Have Bigger Governments?” Journal of Political Economy, Vol. 106, No. 5, 1998, pp. 997-1032.
http://dx.doi.org/10.1086/250038

[20]   M. Keen and M. Marchand, “Fiscal Competition and the Pattern of Public Spending,” Journal of Public Economics, Vol. 66, No. 1, 1997, pp. 33-53.
http://dx.doi.org/10.1016/S0047-2727(97)00035-2

[21]   P. Taylor-Gooby, “In Defence of Second-Best Theory: State, Class and Capital in Social Policy,” Journal of Social Policy, Vol. 26, No. 2, 1997, pp. 171-192.
http://dx.doi.org/10.1017/S0047279497004996

[22]   D. Cameron, “The Expansion of the Public Economy: A Comparative Analysis,” American Political Science Review, Vol. 72, No. 4, 1978, pp. 1243-1261.
http://dx.doi.org/10.2307/1954537

[23]   E. Huber, C. Ragin and J. Stephens, “Social Democracy, Christian Democracy, Constitutional Structure, and the Welfare State,” American Journal of Sociology, Vol. 99, No. 3, 1993, pp. 711-749.
http://dx.doi.org/10.1086/230321

[24]   G. Garrett, “Capital Mobility, Trade, and the Domestic Politics of Economic Policy,” In: R. Keohane and H. Milner, Eds., Internalization and Domestic Politics, Cambridge University Press, New York, 1996, pp. 79-107.
http://dx.doi.org/10.1017/CBO9780511664168.005

[25]   D. Quinn, “The Correlates of Change in International Financial Regulation,” American Political Science Review, Vol. 91, No. 3, 1997, pp. 531-552.
http://dx.doi.org/10.2307/2952073

[26]   M. Hallerberg and S. Basinger, “Internationalization and Changes in Tax Policy in OECD Countries: The Importance of Domestic Veto Players,” Comparative Political Studies, Vol. 31, No. 3, 1998, pp. 321-353.
http://dx.doi.org/10.1177/0010414098031003003

[27]   A. Dreher, “The Influence of Globalization on Taxes and Social Policy—An Empirical Analysis for OECD Countries,” European Journal of Political Economy, Vol. 22, No. 1, 2006, pp. 179-201.
http://dx.doi.org/10.1016/j.ejpoleco.2005.04.006

[28]   D. Rodrik, “Has Globalization Gone Too Far,” Institute for International Economics, Washington DC, 1997.

[29]   D. Swank, “Funding the Welfare State: Globalization and the Taxation of Business in Advanced Market Economies,” Political Studies, Vol. 46, No. 4, 1998, pp. 671-692. http://dx.doi.org/10.1111/1467-9248.00161

[30]   F. Heinemann, “Does Globalization Restrict Budgetary Autonomy: A Multidimensional Approach,” ZEW Discussion Paper No 29, 1999.

[31]   D. Swank and S. Steinmo, “The New Political Economy of Taxation in Advanced Capitalist Democracies,” American Journal of Political Science, Vol. 46, No. 3, 2002, pp. 642-655. http://dx.doi.org/10.2307/3088405

[32]   L. Bretschger and F. Hettich, “Globalisation, Capital Mobility and Tax Competition: Theory and Evidence for OECD Countries,” European Journal of Political Economy, Vol. 18, No. 4, 2002, pp. 695-716.
http://dx.doi.org/10.1016/S0176-2680(02)00115-5

[33]   H. Winner, “Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data,” International Tax and Public Finance, Vol. 12, No. 5, 2005, pp. 667-687.
http://dx.doi.org/10.1007/s10797-005-2915-0

[34]   P. Schwartz, “Does Capital Mobility Reduce the Corporate-Labor Tax Ratio?” Public Choice, Vol. 130. No. 3-4, 2007, pp. 363-380.
http://dx.doi.org/10.1007/s11127-006-9092-2

[35]   W. Oates, “Fiscal Federalism,” Harcourt Brace Jovanovich, New York, 1972.

[36]   G. Garrett and J. Rodden, “Globalization and Fiscal Decentralization,” In: M. Kahler and D. Lake, Eds., Governance in a Global Economy: Political Authority in Transition, Princeton University Press, Princeton, 2003, pp. 87-109.

[37]   A. Alesina and E. Spolaore, “On the Number and Size of Nations,” Quarterly Journal of Economics, Vol. 112, No. 4, 1997, pp. 1027-1056.
http://dx.doi.org/10.1162/003355300555411

[38]   A. Alesina and R. Wacziarg, “Openness, Country Size and Government,” Journal of Public Economics, Vol. 69, No. 3, 1998, pp. 305-321.
http://dx.doi.org/10.1016/S0047-2727(98)00010-3

[39]   P. Bolton and G. Roland, “The Breakup of Nations: A Political Economy Analysis,” Quarterly Journal of Economics, Vol. 112, No. 4, 1997, pp. 1057-1090.
http://dx.doi.org/10.1162/003355300555420

[40]   P. Salmon, “Decentralisation as an Incentive Scheme,” Oxford Review of Economic Policy, Vol. 3, No. 2, 1987, pp. 24-43. http://dx.doi.org/10.1093/oxrep/3.2.24

[41]   L. R. De Mello Jr., “Globalization and Fiscal Federalism: Does Openness Constrain Subnational Budget Imbalances?” Public Budgeting and Finance, Vol. 25, No. 1, pp. 1-14.
http://dx.doi.org/10.1111/j.0275-1100.2005.00351.x

[42]   A. Alesina and R. Perotti, “Economic Risk and Political Risk in Fiscal Unions,” The Economic Journal, Vol. 108, No. 449, 1998, pp. 989-1008.
http://dx.doi.org/10.1111/1468-0297.00326

[43]   Y. Y. Qian and B. R. Weingast, “Federalism as a Commitment to Rreserving Market Incentives,” Journal of Economic Perspectives, Vol. 11, No. 4, 1997, pp. 83-92.
http://dx.doi.org/10.1257/jep.11.4.83

[44]   Y. Qian and G. Roland, “Federalism and the Soft Budget Constraint,” The American Economic Review, Vol. 88, No. 5, 1998, pp. 1143-1162.

[45]   M. Besfamille and B. Lockwood, “Bailouts in Federations: Is a Hard Budget Constraint Always Best?” International Economic Review, Vol. 49, No. 2, 2008, pp. 577-593. http://dx.doi.org/10.1111/j.1468-2354.2008.00490.x

[46]   C. M. Tiebout, “A Pure Theory of Local Government Expenditures,” Journal of Political Economy, Vol. 64, No. 5, 1956, pp. 416-424. http://dx.doi.org/10.1086/257839

[47]   G. Stigler, “The Tenable Range of Functions of Local Governments,” Joint Economic Committee on Federal Expenditure Policy for Economic Growth and Stability, Washington DC, 1957.

[48]   B. M. Mitnick, “The Political Economy of Regulation,” Columbia University Press, New York, 1980.

[49]   G. Garrett and J. Rodden, “Globalization and Decentralization,” Leitner Program in International and Comparative Political Economy, New Haven, 2000.

[50]   J. Slemrod and S. Yitzhaki, “The Costs of Taxation and the Marginal Efficiency Cost of Funds,” IMF Staff Papers, Vol. 43, 1996, pp. 172-198.

[51]   A. Hulsemeyer, “Globalization and Institutional Adjustment—Federalism as an Obstacle?” Ashgate Publishing Limited, Farnham, 2004.

[52]   P. G. Cerny, “Globalization and the Changing Logic of Collective Action,” International Organization, Vol. 49, No. 4, 1995, pp. 595-625.
http://dx.doi.org/10.1017/S0020818300028459

[53]   B. S. Frey and R. Eichenberger, “FOCJ: Competitive Governments for Europe,” International Review of Law and Economics, Vol. 16, No. 3, 1996, pp. 315-327.
http://dx.doi.org/10.1016/0144-8188(96)00019-1

[54]   D. Carey and J. Rabesona, “Tax Ratios on Labor and Capital Income, and on Consumption,” In: P. B. Sorensen, Ed., Measuring the Tax Burden on Capital and Labor, CESIFO Seminar Series, MIT Press, Cambridge, 2004.

[55]   P. Liberati, “Trade Openness, Capital Openness and Government Size,” Journal of Public Policy, Vol. 27, No. 2, 2007, pp. 215-247.
http://dx.doi.org/10.1017/S0143814X07000670

[56]   K. P. Hagen, E. Norman and P. B. Sorensen, “Financing the Nordic Welfare States in an Integrating Europe,” In: P. B. Sorensen, Ed., Tax Policy in the Nordic Countries, MacMillan, Houndmills, 1998, pp. 138-203.

[57]   A. Pagan, “Econometric Issues in the Analysis of Regressions with Generated Regressors,” International Economic Review, Vol. 25, No. 1, 1984, pp. 221-247.
http://dx.doi.org/10.2307/2648877

[58]   M. Arellano and S. Bond, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 277-297.
http://dx.doi.org/10.2307/2297968

[59]   M. Arellano and O. Bover, “Another Look at the Instrumental Variable Estimation of Error-Components Models,” Journal of Econometrics, Vol. 68, No. 1, 1995, pp. 29-51. http://dx.doi.org/10.1016/0304-4076(94)01642-D

[60]   R. Blundell and S. Bond, “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models,” Journal of Econometrics, Vol. 87, No. 1, 1998, pp. 115-143.
http://dx.doi.org/10.1016/S0304-4076(98)00009-8

[61]   D. Roodman, “How To Do Xtabond2: An Introduction to ‘Difference’ and ‘System’ GMM in Stata,” Stata Journal, Vol. 9, No. 1, 2009, pp. 86-136.

 
 
Top