Papers highlighted this week:
Fiscal policy has been more counter-cyclical under the Stability and Growth Pact
DP3933 Fiscal Policy and Monetary Integration in Europe
Authors: Jordi Galí (University of Pompeu and CEPR) and Roberto Perotti (European University Institute and CEPR)
June 2003
A popular view among economists, policy-makers, and the media, is that the Maastricht Treaty and then Stability and Growth Pact have significantly impaired the ability of EU governments to conduct a stabilizing fiscal policy and to provide an adequate level of public infrastructure. CEPR Discussion Paper No. 3933 investigates this view by estimating fiscal rules for the discretionary budget deficit over the period 1980-2002, using data on EMU countries and control groups of non-EMU EU countries and other non-EU OECD countries. Galí and Perotti do not find much support for this view. In fact, they find that discretionary fiscal policy in EMU countries has become more counter-cyclical over time, following what appears to be a trend that affects other industrialized countries as well. Though they point out that there is still some way to go before EMU countries use fiscal policy as a tool for stabilization to the extent that other countries use it. Similarly, they find that the decline in public investment experienced over the last decade by EMU countries is part of a worldwide trend that started well before the Maastricht Treaty was signed.
No 'race to bottom' for corporate income tax in Europe
DP3952 Foreign Ownership and Corporate Income Taxation: An Empirical Evaluation
Authors: Harry Huizinga (Tilburg University and CEPR) and Gaetan Nicodeme (European Commission)
June 2003
Economic integration in Europe has not led to a 'race to the bottom' regarding corporate income taxes. This Paper documents trends in the foreign ownership of companies in Europe and examines whether foreign ownership has exerted a positive influence on corporate income tax levels. Using company-level data from balance sheets and income statements for 15 000 European firms in 34 countries, the authors document that foreign ownership share in Europe stood at around 21.5% in the year 2000. The empirical analysis in the study suggests that corporate tax levels are positively related to country-level foreign ownership shares and that the effect is economically significant. The estimation suggests that a one percentage point increase in foreign ownership increases the average corporate income tax rate between 0.5-1%. A positive relationship between the corporate tax burden and foreign ownership is shown to exist for a range of individual economic sectors. However, it appears to be limited to Western Europe and not extend to Eastern Europe.
The finding contradicts the theory that economic integration will exert a downward pressure on corporate tax rates as it renders the international location of productive capital more responsive to national tax policies. The authors suggest that the absence of a 'race to the bottom' in corporate income taxes, in part due to the already significant foreign ownership share at present, may be a reason that proposals to coordinate corporate income taxes in the EU have not taken hold.
Study finds globalization has not created 'pollution havens' in less developed countries
DP3932 Globalization and Dirty Industries: Do Pollution Havens Matter?
Authors: Jaime de Melo (University of Neuchatel) and Jean-Marie Grether (University of Geneva and CEPR)
June 2003
This Paper reviews arguments and evidence on the impact of globalization on the environment, then presents evidence on production and international trade flows in five heavily polluting industries for 52 countries over the period 1981-98. The authors use their analysis to find out whether a 'race to the bottom' or 'pollution havens' effect has taken place, with heavy polluting industries moving to countries with lower standards. This idea gained new momentum by those who have read into globalization a breakdown of national borders, making it difficult to control the location decisions of multinational co-operations.
The analysis presented in the Paper indicates that the period witnessed a trend towards relocation of all polluting industries except one. However, the evidence for this trend, in terms of aggregate comparisons of output and firm-level estimates of Foreign Direct Investment location choices was at best marginal. Therefore was only found to be weak evidence for location choices by multinational firms across developing countries being determined by differences in environmental regulations. The authors found no evidence of trade flows being significantly driven by the regulatory gap. The Paper therefore provides some support for the 'pollution havens' theory and also identifies a new explanation for the less-than-expected relocation of polluting industries to Less Developed Countries: relatively high natural barriers to trade in heavy polluting industries.
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Discussion Papers by CEPR this week: