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 effective taxation of capital is higher. In contrast to a widely held view, globalization appears in many countries to have supported the ability of government to tax capital.