How Globalization Affects Tax Design

41 Pages Posted: 25 Jan 2009 Last revised: 28 Jul 2010

See all articles by James R. Hines Jr.

James R. Hines Jr.

University of Michigan; NBER

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: January 2009

Abstract

The economic changes associated with globalization tighten financial pressures on governments of high-income countries by increasing the demand for government spending while making it more costly to raise tax revenue. Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio of personal and corporate income tax collections to total tax revenues. Governments of small countries instead rely on consumption-type taxes, including taxes on sales of goods and services and import tariffs, much more heavily than do larger countries. Since the rapid pace of globalization implies that all countries are becoming small open economies, this evidence suggests that the use of expenditure taxes is likely to increase, posing challenges to governments concerned about recent changes in income distribution.

Suggested Citation

Hines, James Rodger and Summers, Lawrence H., How Globalization Affects Tax Design (January 2009). NBER Working Paper No. w14664. Available at SSRN: https://ssrn.com/abstract=1332603

James Rodger Hines (Contact Author)

University of Michigan ( email )

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NBER

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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