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

• Date: 01 September 2021
• DOI: 10.1177/1065912920916556
• Author: Zhiyuan Wang
• Published date: 01 September 2021
• Subject Matter: Articles

https://doi.org/10.1177/1065912920916556

Political Research Quarterly

2021, Vol. 74(3) 571 –586

© 2020 University of Utah

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/1065912920916556

journals.sagepub.com/home/prq

Article

Introduction

Leftist governments prefer higher corporate tax rates.

However, current scholarship only provides inconclusive

and mixed empirical support for this policy preference

(Basinger and Hallerberg 2004; Garrett 1998; Hays 2003;

Inclan, Quinn, and Shapiro 2001; Kumar and Quinn

2012; Shin 2017; Swank and Steinmo 2002). As a matter

of fact, worldwide corporate tax rates have converged

downwardly for the past three decades (Devereux,

Griffith, and Klemm 2002; Rodrik 1997; Slemrod 2004).

Paradoxically, this trend seems to go hand in hand with

the global rise of leftist governments since the 1990s

(Figure 1). If we look at individual countries, leftist gov-

ernments have witnessed cuts in corporate tax rates

almost everywhere, from Denmark, France, and South

Africa, to Sri Lanka, India, China, Uruguay, and Canada.

Then, what explains this puzzling occurrence? I intend

this study to explore answers to this question.

Globalization accelerates downward policy conver-

gence among states, as it significantly externalizes the

effects of domestic policy changes (e.g., Basinger and

Hallerberg 2004; Cao 2010; Lee and Strang 2006;

Swank 2006). As one constitutive feature of globaliza-

tion, capital flows at the global level and profoundly

affects a state’s economy (International Monetary Fund

2000). States join a fierce competition for this scarce

resource. Capital-friendly policies that help states sur-

vive the competition forces their convergence across

borders. For example, when states who compete for

capital restrict labor rights to lower the cost of labor in

the hope of attracting and retaining investment, others in

the same competition feel pressured to follow suit

(Davies and Vadlamannati 2013; Mosley 2011).1

However, not all governments can make this type of

policy move because the political costs of doing so are

unbearably high. It is especially true for leftist govern-

ments: reducing labor rights protection has a direct neg-

ative impact on their constituencies. Therefore, in the

face of this downward pressure, leftist governments will

look for policy alternatives that can achieve the goals

that diminished labor rights protection is expected to

accomplish, among which lowering corporate tax rates

is a competitive one. Specifically, I argue that when it is

politically unfeasible for leftist governments to restrict

916556PRQXXX10.1177/1065912920916556Political Research QuarterlyWang

research-article2020

1University of Florida, Gainesville, USA

Corresponding Author:

Zhiyuan Wang, Department of Political Science, University of Florida,

Anderson Hall 223, Gainesville, FL 32611, USA.

Email: zhiyuan.wang@ufl.edu

Choosing a Lesser Evil: Partisanship,

Labor, and Corporate Taxation under

Globalization

Zhiyuan Wang1

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.

Keywords

leftist governments, globalization, labor, taxation

572 Political Research Quarterly 74(3)

labor rights to maintain economic competitiveness, they

seek to spur investment by allowing investors to keep a

greater share of the return to their investment through

levying lower capital taxes, which is demonstrably

effective and less politically costly.

To operationalize the pressure facing leftist govern-

ments to restrict labor rights, I first use novel global panel

data on labor rights and the structural equivalence tech-

nique to calculate yearly labor rights policies in a state’s

capital competitors, which are identified using bilateral

foreign direct investment (FDI) stock data, a practice

widely adopted in extant literature (Baccini and Koenig-

Archibugi 2014; Cao 2010; Elkins, Guzman, and

Simmons 2006). I then construct policy pressure as the

difference between a state’s own labor rights score and its

competitors’ policy for a given year, which increases as

the competitors’ policy decreases (i.e., competitors reduc-

ing labor rights protection) when it is unable to do the

same. I find robust support for the theoretical conjecture.

Although leftist governments do levy higher taxes on cor-

porations than their partisan opponents, they can only do

so when they do not face strong pressure from their com-

petitors to restrict labor rights. As the pressure increases,

they are forced to retreat from their revealed policy posi-

tions by cutting corporate tax rates.

This study contributes to current scholarship on sev-

eral fronts. By recognizing the condition under which

leftist governments are unable to pursue their preferred

tax policies, it helps to resolve the inconsistency in

partisan taxation findings (Basinger and Hallerberg

2004; Devereux, Lockwood, and Redoano 2008;

Garrett 1998; Hays 2003; Inclan, Quinn, and Shapiro

2001; Swank and Steinmo 2002; Williams and Collins

1997). In doing so, it also reconciles two seemingly

opposing strands of literature: partisan taxation schol-

arship which postulates that an ideologically staunch

leftist government insists on taxing capital heavily

(Garrett 1998; Hays 2003; Inclan, Quinn, and Shapiro

2001; Quinn and Shapiro 1991; Swank 2002) and

investment research contending that leftist govern-

ments are less bound by their revealed ideological posi-

tions in promoting economic growth (Cioffi and Höpner

2006; Pinto 2013). Finally, it supports the latest studies

that examine how leftist governments substitute opaque

pro-businesses policies for transparent pro-welfare tax

policies (Shin 2017), by shedding light on a little noted

cross-issue policy substitution.

The remaining of the article is structured as follows:

the next section reviews the literature on partisanship and

capital taxation. This is followed by a presentation of my

theoretical argument. The specifics on data and estima-

tion strategy are then given. The findings are discussed

afterward. The conclusion summarizes the key findings

and discusses the future research direction.

Partisan Government and Corporate

Taxation

Leftist governments pursue social-economic equality

through redistribution (Bradley et al. 2003). The leftist

governments’ tax policy is therefore expected to rely more

on capital than labor income taxation. Many studies sup-

port the conjecture that leftist governments set higher cor-

porate tax rates (Garrett 1998; Inclan, Quinn, and Shapiro

2001; Kumar and Quinn 2012; Shin 2017). However,

other scholars come to different conclusions: either leftist

governments lower statutory corporate tax rates (Swank

and Steinmo 2002; Williams and Collins 1997) or parti-

sanship has no statistically significant impact on tax pol-

icy enactments (Basinger and Hallerberg 2004; Devereux,

Lockwood, and Redoano 2008). These conflicting find-

ings appear to suggest that leftist governments do not pur-

sue their preferred policy unconditionally.

However, there is little research on the conditions that

constrain leftist governments’ choice on corporate tax

rates. Plümper, Troeger, and Winn’s (2009) study is a

notable exception. They argue that a leftist government

levies higher corporate taxes when fairness constraints

facing it are high. Another exception is Shin’s (2017)

recent paper. It postulates that leftist governments can

maintain high tax rates because they relax regulations on

transfer pricing, allowing firms to transfer profits abroad

with more ease and thus reduces their tax burden. These

Figure 1. Global trends in statutory corporate tax rates and

leftist governments: 1993–2012.

Source. Data on statutory corporate tax rates are taken from KPMG

(2006, 2015) Global Tax Rate Surveys. Data on leftist government are

taken from the Database of Political Institutions (Cruz, Keefer, and

Scartascini 2016).