Journal Article

Will Social Welfare Expenditures Survive Tax Competition?

James R. Hines

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 22, issue 3, pages 330-348
Published in print January 2006 | ISSN: 0266-903X
Published online January 2006 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grj020
Will Social Welfare Expenditures Survive Tax Competition?

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  • Economic Development and Growth
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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.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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