The Globalization Paradox Revisited

23 Pages Posted: 23 Jul 2014

See all articles by Gregor Schwerhoff

Gregor Schwerhoff

International Monetary Fund (IMF)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Date Written: July 22, 2014

Abstract

According to the Globalization Paradox, globalization limits the freedom of choice for national governments. Capital mobility in particular induces tax competition, thus putting downward pressure on capital taxes. However, while capital mobility introduces the inefficiency of tax competition, it makes the allocation of capital more efficient. Whether national welfare and tax-financed public good provision increase or decrease through capital mobility depends on country characteristics. These characteristics include the relative capital endowment, the availability of taxes on fixed factors such as land and the preference for the public good. We compare the two second best settings of a closed economy and an economy with capital mobility to show that the relative capital endowment determines whether the net effect of capital mobility is positive. Fixed factor taxes have the potential to improve welfare by defusing the globalization trilemma through a reduction in the need for capital taxation.

Keywords: capital mobility, globalization, interjurisdictional competition, public good provision

JEL Classification: D62, H21, H50, H73, H87

Suggested Citation

Schwerhoff, Gregor and Edenhofer, Ottmar, The Globalization Paradox Revisited (July 22, 2014). CESifo Working Paper Series No. 4878, Available at SSRN: https://ssrn.com/abstract=2469725 or http://dx.doi.org/10.2139/ssrn.2469725

Gregor Schwerhoff (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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