Globalization and Factor Income Taxation
Exploiting a new global macro-historical database of effective tax rates, we uncover an intriguing pro-tax-capacity effect of international trade. While effective capital tax rates have fallen in developed countries, they have risen in developing countries since the mid-1990s. Event studies of trade liberalization shocks and instrumental variable regressions show that a significant share of this rise can be explained by trade integration, which increases the share of output produced in large corporations, where capital is easier to tax. In contrast to a widely held view, globalization appears in many countries to have supported the ability of government to tax capital.
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