HOW DOES GLOBALIZATION AFFECT THE IMPLICIT TAX RATES ON LABOR INCOME, CAPITAL INCOME, AND CONSUMPTION IN THE EUROPEAN UNION?

Authors

  • OZLEM ONARAN,

    1. Onaran: Senior Lecturer in Economics, Department of Economics and Quantitative Methods, Westminster University, 35 Marylebone Road, London NW1 5LS, UK. Phone +44 20 7911 5000, Fax +44 20 7911 5703, E-mail o.onaran@westminster@ac.uk
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  • VALERIE BOESCH,

    1. Boesch: Research Assistant, Vienna University of Economics and Business, Research Institute International Taxation, Augasse 2-6, A-1090 Vienna, Austria. Phone +43-1 31336-5932, Fax +43-1 31336-728, E-mail valerie.boesch@wu.ac.at
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  • MARKUS LEIBRECHT

    1. Leibrecht: Senior Economist, Department of Economics and Research Institute International Taxation, Vienna University of Economics and Business, Augasse 2-6, A-1090 Vienna, Austria. Phone +43-1 31336-5833, E-mail markus.leibrecht@wu.ac.at
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    • The authors are grateful to Ilker Atac, Oliver Prausmüller, Claudia Hochgatterer, and two anonymous referees for very helpful comments. Support from the FWF Project Nr. F2008 is acknowledged. The usual disclaimer applies.


Abstract

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social-democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social-democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)

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