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 as well as 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 income. There is no effect of the ITR on capital income, whereas the ITR on consumption decreases. There are important differences
between the welfare states. In the conservative regimes, social expenditures increase due to globalization, but they are financed to an increasing extent by taxes on labor. In the social democratic regimes, not only social expenditures,
but also the ITRs on capital income and consumption decrease as a result of globalization, whereas the ITR on labor income increases. In the liberal regimes, the ITR on labor income is rising, while social expenditures and the
ITR on consumption is declining. In the southern regimes, the ITRs on both capital income and consumption are decreasing. In the CEE NMS, on average, there seems to be no statistically significant effect of globalization on social expenditures nor on the ITR on capital and labor income. Globalization affects only the ITR on consumption, leading to a decline. However, different welfare regimes react differently: there is a negative effect of globalization on social spending in the Baltic countries, and a negative effect on the ITR on capital income in the post-communist European regimes.