Globalization, Social Cleavages, and Tax Policies

• In Event: Mobile Firms and the Political Economy of Taxation

Abstract

Since globalization generates different groups of losers and winners, governments may employ tax policies in consistent with compensation politics. In this paper, we explore how globalization affects social cleavages, governments’ compensation policies, and thus tax policies. We argue that, when class-based cleavage becomes salient as a consequence of globalization, the tax burden on capital and business owners increases in capital-abundant countries while the tax burden on labor decreases. In this regard, we contend that capital and labor tax burdens substitute each other. On the other hand, when sectoral cleavage becomes salient, capital tax burden is not likely to increase, if not decreases, in comparison to labor tax burden in those countries. Therefore, there will be no significant changes in the relative salience of capital over labor taxation. Political parties matter, but we also find that social cleavage types condition the party effects on tax policies. Analysis on the OECD countries from 1980 to 2006 provides an empirical support for our arguments.

Authors

• Hoon Lee, Texas Tech University

• Wonjae Hwang, University of Tennessee