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Globalisation squeezes the public sector—is it so obvious?

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Abstract

It is widely perceived that globalization squeezes public sector activities by making taxation more costly. This is attributed to increased factor mobility and to a more elastic labour demand due to improved scope for relocation of production, and thus employment across countries. We argue that this consensus view overlooks that gains from trade unambiguously work to lower the marginal costs of public funds. Moreover, we argue that a more elastic labour demand may actually reduce the marginal costs of labour income taxation and that globalization may actually reduce the labour demand elasticity.

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Authors and Affiliations

  1. School of Economics and Management, Aarhus University, Aarhus, Denmark

    Torben M. Andersen

  2. Department of Economics, Aarhus University, Aarhus, Denmark

    Allan Sørensen

Authors
  1. Torben M. Andersen
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  2. Allan Sørensen
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Corresponding author

Correspondence to Torben M. Andersen.

Additional information

We thank three anonymous referees and John D. Wilson for helpful suggestions that have improved the paper significantly. Financial support from the Danish Research Council (FSE) and the Globalization Programme at Aarhus University is gratefully acknowledged.

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Andersen, T.M., Sørensen, A. Globalisation squeezes the public sector—is it so obvious?. Int Tax Public Finance 18, 369–382 (2011). https://doi.org/10.1007/s10797-011-9166-z

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  • DOI: https://doi.org/10.1007/s10797-011-9166-z

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