AFTER surveying the research on international capital mobility and capital taxation in his recent book on globalization, Duane Swank concludes: "The weight of the evidence leads to the unanticipated impression that international capital mobility may be unrelated (or even positively related) to capital taxation."(1) This is arguably one of the most important and, as Swank notes, unexpected findings to come out of the literature on globalization. The debate over capital taxation, perhaps more than any other, clearly divides those who are pessimistic about the domestic political consequences of globalization and those who believe governments still have substantial room to maneuver in the global economy. While it may be reassuring to think that the tax constraints associated with globalization are weak, this conclusion is often based on one of two problematic assumptions: (1) that globalization implies a race to the bottom in capital taxes or (2) that the tax systems of the social democratic corporatist countries are undermined the most by international capital mobility. Scholars who design their research on these assumptions are either looking for the wrong thing or searching in the wrong places. I argue in this article that globalization will lead to (partial) capital tax convergence-not to the bottom but to somewhere near the center of the existing distribution of capital tax rates. Moreover, the countries that are the most dependent on capital taxes are the ones that will feel the revenue pinch. These are the majoritarian democracies with liberal market economies not the social democratic corporatist countries. The article is organized as follows. In the first section, I review the debate over globalization and capital taxation, placing particular emphasis on the theoretical case against tax policy convergence. I present some data that challenge this position and then argue that consensus democracy can help account for the puzzling empirical patterns we observe. In the second section I build a game-theoretic model of a small open-economy democracy that incorporates the distinction between consensus and majoritarian polities in order to theorize about how political institutions might mediate globalization pressures. The model predicts that globalization-specifically increased international capital mobilitr-lvvill have the greatest negative impact on capital tax rates in relatively closed and capital-rich countries with majoritarian political institutions. I test this and other predictions with both quantitative and qualitative evidence in the third section and then in the conclusion discuss avenues for future research.
