Funding the Welfare State: Globalization and the Taxation of Business in Advanced Market Economies
| DOI | 10.1111/1467-9248.00161 |
| Author | Duane Swank |
| Published date | 01 September 1998 |
| Date | 01 September 1998 |
| Subject Matter | Article |
Funding the Welfare State:
Globalization and the Taxation
of Business in Advanced
Market Economies
DUANE SWANK*
Marquette University
Theorists assert that international capital mobility creates substantialpressure for all
democratically elected governments to decrease tax burdens on business. I explicate
and critique the general version of this theory and oer an alternative view. Empiric-
ally, I explore whether or not the globalization of capital markets has resulted
in decreases in business social security, payroll, and pro®t taxes. I also investigate
whether or not capital mobility has intensi®ed governmentresponsiveness to domestic
investment and pro®tability. Evidence suggests that business tax burdens have not
been reduced in the face of rises in capital mobility nor is tax responsiveness to
pro®tability and domestic investment intensi®ed by more open capital markets. To
the contrary, analyses indicate that business taxation has become subject to new
`market conforming' policy rules that developed in tandem with liberalization of
markets. These new policy orientations reduce the economic management roles of
business taxation while leaving the revenue-generating roles intact. In conclusion, I
discuss the implications of the ®ndings for questions concerning the structuralpower
of internationally mobile capital, redistributive policies, and the autonomy of
democratically elected governments in a global economy.
It has become commonplace to suggest that contemporary governments in the
advanced capitalist democracies have converged around a neoliberal approach
to economic management. The neoliberal pattern also appears to hold for tax
policies: most governments have reduced marginal personal and corporate
income tax rates and have generally reduced the redistributive roles of taxes.
A widely oered explanation for these changes is the dramatic increase in the
international mobility of capital. Numerous surveys of tax policy change and
#Political Studies Association 1998. Published by Blackwell Publishers, 108 CowleyRoad, Oxford OX4 1JF, UK and 350 Main
Street, Malden, MA 02148, USA.
Political Studies (1998), XLVI, 671±692
* This paper was presented at the 1996 Annual Meeting of the American Political Science
Association and the Institute for Policy Research, Northwestern University, October 1996. I thank
the German Marshall Fund of the United States and Marquette University for generous ®nancial
support, Klaus Hertweck for research assistance, and Dennis Quinn for data on liberalization of
international ®nancial markets. Francis Castles, John Freeman, Georey Garrett, Cathie Martin,
Dennis Quinn, Michael Shalev, Michael Wallerstein,Northwestern University seminar participants,
and two anonymous referees provided helpful comments.
globalization have highlighted the likely policy consequences of capital mobility.
McKenzie and Lee state the familiar argument succinctly:1
The recent revolution in computer and information technology has enabled
®rms to move assets around the world at the touch of a button. It has also
caused an explosion of competition not only among business, but among
national governments seeking to attract new business and to keep existing
business within their borders. This competition has forced governments to
reduce tax rates, spending, and regulations and to lower trade barriers. The
resulting loss of ®scal and regulatory power has put a sever crimp in the
very ability of these governments to govern.
As much of the literature suggests, one should expect to ®nd a relationship
between capital mobility and business taxation. However, despite a large theo-
retical and case-study literature, there is little if any hard evidence that greater
international capital mobility is systematically related to lower taxes on capital.
Indeed, there is evidence to suggest that business tax burdens have been
maintained or slightly increased in the wake of internationalization of ®nancial
markets. The explanation for this anomaly is rooted in an understanding of the
shift from market-regulating to market-conforming policy `rules' in the area of
tax policy. These new policy orientations reduce the economic management
functions of tax policy while leaving its revenue-generating roles intact.
In this paper, I focus on the impact of capital mobility on business income,
social security, and payroll taxes. Pro®t taxes directly in¯uence the rateof return
on capital and a reduction in tax burdens serves as a potentially important
instrument for policy makers seeking to bolster domestic and international
investment. Cuts in business social security and payroll taxes shift social costs
away from capital and increase net pro®ts.2
The ®rst section of the paper discusses the theoretical rationale for expecting
that international capital mobility shapes business tax policies. In the second
part, I critique this argument and supply an alternative view of the relationship
between capital mobility and taxation. The third section of the paper discusses
methodological issues and presents empirical models of business taxation. The
next section discusses ®ndings while the ®nal portion of the paper re¯ects on the
implications of ®ndings for the structural powerof capital, redistributive policies,
and the autonomy of democratically elected governments in a global economy.
1R. McKenzie and D. Lee, Quicksilver Capital: How the Rapid Movement of Wealth Has
Changed the World (New York, Free, 1991), p.1. For surveys of tax policy changes see, among
others, M. Boskin and C. McClure, World Tax Reform (San Francisco, International Center for
Economic Growth, 1990), Organization for Economic Cooperation and Development (hereafter
OECD), Taxation in Developed Countries (Paris, OECD, 1987); OECD, Economies in Transition
(Paris, OECD, 1989), esp. ch.5; OECD, Taxation in OECD Countries (Paris, OECD, 1993); On the
causes and consequences of globalization, see the synoptic literaturereview in B. J. Cohen, `Phoenix
risen: the resurrection of global ®nance', World Politics, 48 (1996), 268±96.
2I assume that in generally competitive domestic and international markets business can shed
less than 100% of the tax burden in the short term. Even if business can shift 100% of the burden
of, let us say, employer social security taxes to labour in the long-term (and this isthe conventional
view), business will prefer a reduction in these taxes as a way of reducing real labour costs. I also
assume that, while the tax treatment of foreign earnings is important in a world of global capital
markets, pro®ts and social security/payroll taxes play central roles in shaping patterns of inter-
national capital movements. On the causal role of taxation, see among others, OECD, Taxationin a
Global Economy: Domestic and International Issues (Paris, OECD, 1991); International Monetary
Fund, Determinants and Consequences of International Capital Flows(Washington DC, IMF, 1991).
672 Funding the Welfare State
#Political Studies Association, 1998
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