Tax competition and income inequality : why did the welfare state survive?

Contrary to the belief of many, tax competition did not undermine the foundations of the welfare state and did not even abolish the taxation of capital. Instead, tax competition caused governments to shift the tax burden from capital to labor, thereby increasing income inequality in liberal market economies that traditionally redistribute income by relatively high effective capital taxes and relatively low effective labor taxes. In contrast, income inequality did increase little or not at all in social welfare states that dominantly use social security transfers to redistribute income. Governments in social welfare states found it easy to maintain high social expenditures because they increasingly taxed labor, which is relatively immobile, to finance social security transfers. We test the predictions of this theory using a simultaneous equation approach that accounts for the endogeneity of tax policies, fiscal policies, and deficits

Exchange Rate Regime Choice with Multiple Key Currencies

Recent scholarship on exchange rate regime choice seeks to explain why some countries fix their exchange rate to an anchor currency, but it neglects the question to which currency countries peg. This article posits that an understanding of the choice of anchor currency also improves political economists’ understanding of the decision for an exchange rate peg itself. Drawing on the ‘fear of floating literature’, we argue that the choice of anchor currency is mainly determined by the degree of dependence of the potentially pegging country on imports from the country or currency union issuing the key currency as well as the degree of dependence on imports from the currency area, that is, from other countries which have already pegged to that key currency. This is because an exchange rate depreciation against the main trading partners’ currency increases domestic inflationary pressures due to exchange-rate pass-through. In addition, our theory claims that central bank independence and de facto fixed exchange rates are complements (rather than substitutes) since independent central banks care more than governments about imported inflation. Analyzing a pooled cross-section of 106 countries over the period 1974 to 2005, we find ample evidence in support of our theoretical predictions.

External Effects of Currency Unions

Argument: The paper argues that the introduction of the Euro has considerably reduced de facto monetary policy autonomy in non-ECU members. We start from a simple Mundellian model, in which currency unions raise economic efficiency but reduce monetary policy autonomy. Our main argument holds that governments in countries that did not join the currency union lose monetary policy autonomy if the establishment of a currency union increases the size of the key currency area. The increase in the size of the key currency area has two external effects on countries remaining outside the currency union: Firstly, it renders stable exchange-rates to the currency union slightly more important, because the value of goods imported from countries within the currency union increases and because the countries inside the union have more synchronized business cycles. Secondly and more importantly, we claim that any given change in the real interest-rate differential leads to an exchange-rate effect, which is larger the smaller the domestic currency area is relative to the key currency area. Consequently, governments in non-member countries have to pay a higher price if they seek to stimulate the domestic economy. Hypotheses: a) Exchange-rate effects on changes in the real interest rate differential are larger, if currency areas are less equal in size. b) Outsider countries more closely follow the interest-rate policy of the currency union than they had previously followed the monetary policy of the anchor currency. Empirics: We employ a panel-GARCH model to estimate the impact of changes in the key currency real interest rate on the real interest rate of other countries. Specifically, we analyze the influence of Germany’s and the Eurozone’s monetary policy on the monetary policy of Great Britain, Denmark, Norway, Sweden, and Switzerland. Results: Our results support the assumptions underlying our model as well as our main argument. De facto monetary autonomy of countries remaining outside a currency union declines with the establishment of the union. ZUSAMMENFASSUNG - (Externe Auswirkungen von Währungsunionen) Der Artikel argumentiert, dass die Einführung des Euro die faktische geldpolitische Autonomie auch in Staaten reduziert hat, die der Europäischen Währungsunion nicht beigetreten sind. Das Argument basiert auf einem einfachen Mudellianischen Modell, in dem Währungsunionen die wirtschaftliche Effizienz steigern aber zugleich die geldpolitische Autonomie reduzieren. Wir zeigen über das Standardmodell hinaus, dass Länder, die der Währungsunion nicht beitreten, geldpolitische Autonomie einbüßen, wenn sich durch die Währungsunion die Größe des Leitwährungsraumes erhöht. Diese Vergrößerung des Leitwährungsraumes hat zwei Auswirkungen auf Länder außerhalb der Union: Erstens steigt die Bedeutung stabiler Wechselkurse leicht an, weil der Wert importierter Güter aus dem Währungsgebiet zunimmt und weil die Länder der Union stärker synchronisierte Konjunkturzyklen aufweisen als vor der Gründung der Währungsunion. Zweitens steigt durch die Vergrößerung der Leitwährung aber der Einfluss von Veränderungen der Zinsdifferenz auf die Wechselkurse zwischen Währungen außerhalb der Währungsunion und der Unionswährung an. Folglich müssen Länder eine stärkere Abwertung ihrer Währung hinnehmen, wenn sie die Zinsen senken, um die Konjunktur anzukurbeln. Wir testen dieses Argument anhand der zwei Kernhypothesen: a) Wechselkurse reagieren umso stärker auf Veränderungen der Zinsdifferenz, je größer der Leitwährungsraum ist. b) Länder außerhalb der Währungsunion folgen der Geldpolitik der Union stärker, als sie der Geldpolitik der Leitwährung vor Gründung der Union folgten. Wir greifen auf Panel-GARCH Modelle zurück, um den Einfluss der Geldpolitik der EZB relativ zum Einfluss der Bundesbank auf die Geldpolitik in Großbritannien, der Schweiz, Norwegen, Dänemark und Schweden zu testen. Die empirische Analyse bestätigt die aus dem formalen Modell abgeleiteten Hypothesen. Die faktische geldpolitische Autonomie der Länder außerhalb der Währungsunion sinkt mit deren Etablierung.Interest Rates, Monetary Policy Autonomy, Currency Unions, Bundesbank, European Central Bank

Free-riding in alliances: testing an old theory with a new method

We revisit the old and well-established theory of free-riding in military alliances. Existing empirical evidence infers free-riding from the larger military expenditures per gross domestic product (GDP) of countries of larger GDP. Yet, larger countries have broader military and geostrategic interests that result in larger defense burdens, thus creating an identification problem for existing tests of free-riding behavior. We therefore develop alternative predictions that ignore differences in the level of military spending and instead relate to growth in spending over time. The safety level of smaller members of an alliance is affected, simultaneously, by changes to military spending of the largest alliance member as well as by spending changes of the main enemy. Using the North Atlantic Treaty Organization (NATO) as test case, we estimate country-specific response functions of the smaller alliance members to growth in United States (US) military spending on the one hand and to growth of Soviet spending (if in excess of US growth) on the other hand, covering the period 1956 to 1988. Results from our quasi-spatial approach corroborate one part of the theory in that we find the vast majority of the smaller NATO allies to be free-riders. However, our empirical evidence flatly contradicts the other part of the free-riding theory: the extent of free-riding is not a function of country size. Smaller allies free-ride, but the relatively larger of the smaller allies do not free-ride any less than the relatively even smaller alliance partners

Inequalities of income and inequalities of longevity: a cross-country study

Objectives. We examined the effects of market income inequality (income inequality before taxes and transfers) and income redistribution via taxes and transfers on inequality in longevity. Methods. Life tables were used to compute Gini coefficients of longevity inequality for all individuals and for individuals that survived at least to the age of ten. Longevity inequality was regressed on market income inequality and income redistribution controlling for a range of potential confounders in a cross-sectional time-series sample of up to 28 predominantly Western developed countries and up to 37 years. Results. Income inequality before taxes and transfers is positively associated with inequality in the number of years lived, while income redistribution (the difference between market income inequality and income inequality after taxes and transfers have been accounted for) is negatively associated with longevity inequality in our sample. Conclusions. To the extent that our estimated effects based on observational data are causal, governments can reduce inequality in the number of years lived not only via public health policies, but also via their influence on market income inequality and the redistribution of incomes from the relatively rich to the relatively poor

Free-riding in alliances: Testing an old theory with a new method

We revisit the old and well-established theory of free-riding in military alliances. Existing empirical evidence infers free-riding from the larger military expenditures per gross domestic product (GDP) of countries of larger GDP. Yet, larger countries have broader military and geostrategic interests that result in larger defense burdens, thus creating an identification problem for existing tests of free-riding behavior. We therefore develop alternative predictions that ignore differences in the level of military spending and instead relate to growth in spending over time. The safety level of smaller members of an alliance is affected, simultaneously, by changes to military spending of the largest alliance member as well as by spending changes of the main enemy. Using the North Atlantic Treaty Organization (NATO) as test case, we estimate country-specific response functions of the smaller alliance members to growth in US military spending on the one hand and to growth of Soviet spending (if in excess of US growth) on the other, covering the period 1956–1988. Results from our quasi-spatial approach corroborate one part of the theory in that we find the vast majority of the smaller NATO allies to be free-riders. However, our empirical evidence flatly contradicts the other part of the free-riding theory: the extent of free-riding is not a function of country size. Smaller allies free-ride, but the relatively larger of the smaller allies do not free-ride any less than the relatively even smaller alliance partners. </jats:p

Spatial spill-overs from terrorism on tourism: Western victims in Islamic destination countries

We analyze spatial spillover effects in international tourism as a consequence of transnational terrorist attacks. Specifically, we hypothesize that attacks executed in Islamic countries on citizens from Western countries will generate spatial spillovers of three kinds. Firstly, tourism from the victims’ countries to Islamic destination countries other than the location of the attacks will decline. Secondly, tourism from other Western countries to the country in which the attacks took place will decline. Thirdly, tourism from other Western countries to other Islamic destination countries also will decline. These spatial spillover effects occur because the terror message is strategically addressed at Western citizens in general rather than the tourists’ countries of origin per se. Tourists update their priors after such attacks, rationally expecting a greater chance of becoming victimized in other Islamic countries as well, given the transnational character of Islamist terror groups and the limited capacity of governments in Islamic countries to prevent such attacks

Fueling the Covid-19 pandemic: summer school holidays and incidence rates in German districts

BACKGROUND: The Robert-Koch-Institute reports that during the summer holiday period a foreign country is stated as the most likely place of infection for an average of 27 and a maximum of 49% of new SARS-CoV-2 infections in Germany. METHODS: Cross-sectional study on observational data. In Germany, summer school holidays are coordinated between states and spread out over 13 weeks. Employing a dynamic model with district fixed effects, we analyze the association between these holidays and weekly incidence rates across 401 German districts. RESULTS: We find effects of the holiday period of around 45% of the average district incidence rates in Germany during their respective final week of holidays and the 2 weeks after holidays end. Western states tend to experience stronger effects than Eastern states. We also find statistically significant interaction effects of school holidays with per capita taxable income and the share of foreign residents in a district's population. CONCLUSIONS: Our results suggest that changed behavior during the holiday season accelerated the pandemic and made it considerably more difficult for public health authorities to contain the spread of the virus by means of contact tracing. Germany's public health authorities did not prepare adequately for this acceleration

Lockdown policies and the dynamics of the first wave of the Sars-CoV-2 pandemic in Europe

This paper follows European countries as they struggled through the first wave of the Sars-CoV-2 pandemic. We analyze when countries were confronted with the virus, how long it took until the number of new infections peaked and at what level of infections that peak was achieved via social distancing and lockdown policies. Most European countries were able to successfully end the first wave of the pandemic – defined as a two-week incidence rate smaller than 10 cases per 100,000 people. We find that countries in which the virus made significant landfall later in time enjoyed a latecomer advantage that some of these countries squandered however by not responding quickly enough and that an early lockdown was more effective than a hard lockdown

Does ‘data fudging’ explain the autocratic advantage? Evidence from the gap between official Covid-19 mortality and excess mortality

Governments can underreport Covid-19 mortality to make their performance appear more successful than it is. Autocracies are more likely to ‘fudge’ these data since many autocratic regimes restrict media freedom and thus can prevent domestic media from reporting evidence of undercounting deaths. Autocracies also enjoy greater leverage over reporting health authorities to either fudge data or adopt restrictive definitions of what constitutes Covid-19 mortality. Controlling for other factors that explain official Covid-19 mortality, excess mortality and the difference between the two, our results suggest that any apparent ‘autocratic advantage’ in fighting the pandemic is likely to only exist in official Covid-19 mortality. Analyzing the gap between excess mortality and official Covid-19 mortality we find that autocracies on average have a larger gap between official Covid-19 mortality data and excess mortality data, which points towards ‘autocratic data fudging’ of their official Covid-19 mortality statistics