Will Social Welfare Expenditures Survive Tax Competition?

Posted: 29 Feb 2008

Date Written: 2006


Increasing economic openness creates demands for social welfare programmes designed to cushion the impact of economic changes, but may also encourage governments to reduce tax rates to attract mobile economic resources. Competitive tax reductions could then prevent governments from being able to finance significant welfare spending. Alternatively, economic globalization might improve the ability of governments to afford social welfare programmes-and several considerations point in this direction. First, taxes on internationally mobile activity represent only small fractions of total revenue collections; personal income taxes, value-added taxes, and social insurance contributions finance most social welfare spending. Second, international competition need not reduce taxes, and indeed, over the past 25 years, corporate tax collections have remained high as fractions of GDP and total taxes. Third, the vitality of a country's economy largely determines its level of social spending. To the extent that incomes rise as a result, greater economic openness should strengthen provision of social welfare.

Suggested Citation

Hines, James Rodger, Will Social Welfare Expenditures Survive Tax Competition? ( 2006). Oxford Review of Economic Policy, Vol. 22, Issue 3, pp. 330-348, 2006, Available at SSRN: https://ssrn.com/abstract=1096836 or http://dx.doi.org/10.1093/oxrep/grj020

James Rodger Hines (Contact Author)

University of Michigan ( email )

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