The effect of globalization on the distribution of taxes and social expenditures in Europe: Do welfare state regimes matter?

This paper estimates the effect of globalization on the implicit tax rates (ITR) on capital income, labor income and consumption, and the share of social protection expenditures in total public expenditures in Western and Eastern Europe. It tests the coexistence of efficiency and compensation effects of globalization on the expenditure and the revenue sides of government budgets. In Western Europe, globalization leads to an increase in social expenditures; however these expenditures are to an increasing extent financed by taxes on labor. There are important differences between the welfare states. In the conservative regimes, both social expenditures and taxes on labor increase due to globalization. In the social-democratic regimes social expenditures are not affected by globalization, but ITR on labor increases, whereas ITR on capital and consumption decrease as a result of globalization. In the liberal regimes, the ITR on labor is rising, while social expenditures are declining. In the southern welfare regime globalization does not have any significant effects on the distribution of taxes or social spending. In Eastern Europe, in the Baltic States globalization leads to a decrease in social spending, whereas in the other Eastern European New Member States (post-communist European regimes) there is an upward convergence in social spending due to globalization. The ITR on consumption decrease due to globalization in the post-communist European regimes, whereas in the Baltics there is no robust significant effect of globalization on taxes.