Fiscal Capacity, Domestic Compensation, and Trade Policy: A Long-Term View
31 Pages Posted: 18 Aug 2014
Date Written: 2014
This paper examines the relationship between domestic tax policies, domestic social policies, and average tariffs in a sample of 32 countries from the 1870s to the present. The paper's main contribution is that it brings together, and evaluates, two different ideas about the domestic politics of trade policy: on the one hand the fiscal capacity hypothesis (the idea that governments depend on tariffs for revenue if few other sources of revenue are available), and on the other hand the compensation hypothesis (the idea that governments use protectionism as a second-best form of social protection if they have no means of compensating losers from trade). We find support for both the fiscal capacity hypothesis and the compensation hypothesis. We also find some support for the conditional hypothesis that the effects of fiscal capacity and compensation are mutually reinforcing: a combination of effective income-tax collection and comprehensive social insurance is associated with especially low tariffs.
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