Fiscal competition and public expenditure composition in the era of globalization: Panel data analysis

Abstract

Amidst the ongoing liberalization of international trade and transnational movement of capital, each nation-state’s fiscal policies have gradually become more dependent on other countries. Developing countries, especially, are forced to make changes to taxation and public expenditure in this era of globalization. It is thus important to understand what kind of relationship exists between globalization and public spending. This study aims to clarify the effects of fiscal competition on public expenditure, from the perspective of the compensation and efficiency theses. These effects currently remain uncertain, despite the growing wave of academic interest in the field. To see how fiscal competition affects the structure of public expenditure, the determinants of public expenditures have been examined for 10 Organization for Economic Co-operation and Development (OECD) countries from 2006-2014. Eleven panel data models have been set up. Public expenditures, as the dependent variable, have been addressed in 10 sub-groups – based on their distribution both as a whole and per their socio-economic functions. Thus, we analyzed the relationship between fiscal competition and both total of public expenditures and the composition of public expenditures. The study thus contributes to the existing literature on fiscal competition. It is observed that corporate tax competition has decreasing effects on all public expenditures. Falling tax revenues due to fiscal competition have the effect of reducing overall public expenditures by decreasing the resources available for use by public policymakers. We can thus evaluate corporate tax competition as having an efficiency increasing effect, by decreasing the government’s share of within the economy.