Choosing a Lesser Evil: Partisanship, Labor, and Corporate Taxation under Globalization

Abstract

Leftist governments tend to tax corporations heavily. However, they are unable to do so all the time. In this study, I posit that whether leftist governments can enact this preferred tax policy is conditional on the policy environment. When leftist governments are pressured by their economic competitors to reduce labor rights protection, instead of giving in, they choose to cut corporate tax rates, because the former is more politically harmful than the latter, and the latter is equally effective in achieving the policy goal the former is intended to accomplish. Using novel global data on labor rights from 1994 to 2012 and the structural equivalence technique to capture the policy pressure to restrict labor rights, I find robust evidence for the argument. This finding suggests that facing globalized economic competition, leftist governments make strategic compromise by adopting market-oriented policies in issue areas that deviate from their desirable ideological positions but are less costly than simply yielding to the pressure to alter policies in those issue areas that directly hurt their core constituencies.