Who Ultimately Bears the Burden of Greater Non-Wage Labour costs?

Azémar, Céline and Rodolphe Desbordes

University of Glasgow Working Paper. [2009]

It is commonly believed that globalisation introduces tax competition as countries reduce tax rates to attract inward investment.  This is supported by evidence of falling corporation at rates in the EU and elsewhere.  But it is contradicted by evidence from the same countries of high corporation tax revenues.  One reason for this apparently contradictory evidence may be that globalisation also leads to increased profit, which in turn generates higher corporation tax revenues, offsetting the cuts in tax rates.

This project tests directly whether globalisation leads to higher or lower tax revenues. Using data from Germany, it finds that tax revenues are higher in jurisdictions which are more globalised – measured by having more foreign direct investment and more trade.   Specifically, it finds that a 10 percentage point increase in an index of a country’s globalisation raises corporation tax revenue by 4.4%.

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