DP14137 Globalization, Redistribution, and the Size of Government
This paper investigates how trade and financial globalization affect government decisions to
redistribute via spending and taxation, using a large panel covering around 100 democratic countries
over the period 1970-2015. We use a time-varying external instrument in regressions with fixed and
time effects in order to overcome endogeneity concerns that have plagued the earlier literature. Our
findings support the view that more open economies have bigger governments. The paper also examines
the impact of globalization on different types of social spending and taxes. We find that trade openness
increases the tax burden on labor income and reduces the tax burden on capital income and that financial
openness reduces corporate income tax rates. In addition, exposure to trade pushes governments to
spend more on labor programs and family benefits. Finally, the paper does not find that political
institutions affect the sensitivity of public spending to globalization.
