The Influence of Globalization on Taxes and Social Policy – an Empirical Analysis for OECD Countries

Using panel regression for the period 1970-2000 the paper analyzes whether globalization has influenced the OECD countries’ social and overall spending as well as their tax rates on labor, consumption and capital. Accounting for potential endogeneity of the regressors, the results show that globalization (measured by an index covering 23 variables) did not generally decrease the leeway for independent economic policy. Globalization even increased implicit tax rates on capital (as calculated by Carey and Rabesona 2002) – a result that is mainly driven by economic integration. However, there seems to be competition over tax rates on capital when data based on legislation as suggested by Devereux and Griffith (2003) is employed. Depending on the method of estimation, increasing social integration also influences policies, while political integration does not matter for economic policy in most specifications.