Economic Integration, Tax Erosion, and Decentralisation: An Empirical Analysis

DOI: 10.4236/me.2013.410A003   PDF   HTML     3,031 Downloads   4,659 Views   Citations


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.


Share and Cite:

F. Gastaldi, P. Liberati and A. Scialà, "Economic Integration, Tax Erosion, and Decentralisation: An Empirical Analysis," Modern Economy, Vol. 4 No. 10A, 2013, pp. 14-26. doi: 10.4236/me.2013.410A003.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] I. Grunberg, “Double Jeopardy: Globalization, Liberalization and the Fiscal Squeeze,” World Development, Vol. 26, No. 4, 1998, pp. 591-605.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[18] R. H. Gordon, “Can Capital Income Taxes Survive in Open Economies?” Journal of Finance, Vol. 47, No. 3, 1992, pp. 1159-1180.
[19] D. Rodrik, “Why Do More Open Economies Have Bigger Governments?” Journal of Political Economy, Vol. 106, No. 5, 1998, pp. 997-1032.
[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.
[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.
[22] D. Cameron, “The Expansion of the Public Economy: A Comparative Analysis,” American Political Science Review, Vol. 72, No. 4, 1978, pp. 1243-1261.
[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.
[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.
[25] D. Quinn, “The Correlates of Change in International Financial Regulation,” American Political Science Review, Vol. 91, No. 3, 1997, pp. 531-552.
[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.
[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.
[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.
[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.
[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.
[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.
[34] P. Schwartz, “Does Capital Mobility Reduce the Corporate-Labor Tax Ratio?” Public Choice, Vol. 130. No. 3-4, 2007, pp. 363-380.
[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.
[38] A. Alesina and R. Wacziarg, “Openness, Country Size and Government,” Journal of Public Economics, Vol. 69, No. 3, 1998, pp. 305-321.
[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.
[40] P. Salmon, “Decentralisation as an Incentive Scheme,” Oxford Review of Economic Policy, Vol. 3, No. 2, 1987, pp. 24-43.
[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.
[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.
[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.
[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.
[46] C. M. Tiebout, “A Pure Theory of Local Government Expenditures,” Journal of Political Economy, Vol. 64, No. 5, 1956, pp. 416-424.
[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.
[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.
[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.
[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.
[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.
[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.
[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.
[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.

comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.