Tax policies in a globalized world: Is it politics after all?

In a panel dataset of 17 OECD countries over 1970–1997, we provide empirical support for the joint existence of the efficiency and the compensation effects of globalization. Our regression analysis shows that higher economic integration—and the associated external risk—lead to a need for social security policies that require higher taxes. The latter take the form of larger social security contributions that are part of taxes on the immobile factors (labor). The tax burden on the relatively mobile factor (capital) is affected negatively by increased economic integration.