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Remodeling the Competition for Capital: How Domestic Politics Erases the Race to the Bottom

Published online by Cambridge University Press:  21 June 2004

SCOTT J. BASINGER  and
MARK HALLERBERG
SCOTT J. BASINGER
Affiliation:
Stony Brook University
MARK HALLERBERG
Affiliation:
Emory University
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Abstract

This paper proposes and tests a new formal model of the competition for capital, using the analogy of a “tournament” as a substitute for the ”race-to-the-bottom” model. Our key insight is that political costs that accompany legislating have both direct and indirect effects on the likelihood and scale of reforms. While countries with higher political costs are less likely themselves to enact reforms, the presence of these costs also reduces competing countries' incentives to reform regardless of their own political costs. Domestic politics therefore mitigates the pressures for downward convergence of tax policy despite increased capital mobility. We examine the capital tax policies in OECD countries during the period from 1980 to 1997 and find that states are sensitive to tax reforms in competitor countries, although their responses to reforms are mediated by their own domestic costs to reform. We define two potential sources of political costs of reform: transaction costs, due to the presence of multiple veto players in the legislative process, and constituency costs, due to ideological opposition to policy changes that benefit capital. Our evidence reveals that a reduction in these costs either domestically or abroad increases the likelihood that a country enacts tax reforms.

Type
ARTICLES
Information
American Political Science Review , Volume 98 , Issue 2 , May 2004 , pp. 261 - 276
Copyright
© 2004 by the American Political Science Association

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