Part 1 - AL-Tax

Chapter 3AbstractMany academic and casual observers contend that the dramatic post-1970s rise in internationalcapital mobility and the steadily upward postwar trend in trade integration, by sharpeningcapital’s threat against domestic governments to flee ‘excessive and inefficient’taxation, has forced and will continue to force welfare/tax-state retrenchment and taxburdenshifts away from more mobile capital (especially financial capital) and toward lessmobile labor (especially manual labor). Several important recent studies of the comparativeand international political economy of policy change over this period challenge such claims,whereas others find more support. We offer a brief review and comparison of these arguments,emphasizing that all imply a strategic interdependence in fiscal policymaking that,in turn, implies a spatial interdependence in tax-policy data, which these previous studiestended to ignore. We then briefly summarize our own preliminary explorations of alternativestrategies for estimating empirical models of such interdependent processes and, finally,we explore the empirical record regarding globalization and tax competition, applying thespatial-lag model in a reanalysis of the capital-tax regressions in Hays (2003).3.1 IntroductionThis paper studies globalization, i.e. international economic integration, and capitaltaxation, emphasizing the implied strategic dependence in fiscal policymakingand the resultant spatial interdependence of fiscal-policy data. Many academicand casual observers argue that the dramatic post-1972 rise in global capitalmobility and the steady postwar rise in trade integration sharpen capital’s threatagainst domestic governments to flee ‘excessive and inefficient’ taxation andpublic policies. This, the standard view holds, has forced and will continue toforce welfare- and tax-state retrenchment and tax-burden shifts from more mobilecapital (especially financial) toward less mobile labor (especially skilled manual).Several important studies of the comparative and international political economyof tax and welfare policies over this era have recently challenged such claims onat least four distinct bases. Garrett (1998) argued that certain combinations of leftgovernment with social-welfare, active-labor-market, coordinated-bargaining, andrelated policies can be as or more efficient than neoliberal state-minimalism andconservative government and, therefore, that capital will not flee such efficientcombinations. Boix (1998) argued that public (human and physical) capitalinvestmentstrategies comprise an alternative to neoliberal minimalism that issufficiently efficient economically to retain and possibly attract capital and politicallyeffective enough to maintain left electoral competitiveness. Hall and Soskice(2001) argued that complex national networks of political–economic institutions45