Governments are being challenged by the forces of economic globalization. Both capital and income marginal tax rates have been reduced due to tax competition, and competition from emerging economies has put pressure on governments to reduce labor taxes. However, these pressures have not led to uniform tax reforms across countries. In fact, globalization has reinforced existing tax regimes: some countries still rely more on ‘hidden’ taxes, namely on employers’ contributions and consumption tax, while others rely more on more visible taxes, such as income tax, for their tax revenues. I argue that a country’s tax mix is, partly, a reflection of the capacity of its political forces to reform the tax system. More adversarial political systems rely more on hidden taxes than on visible and progressive income tax, when they are confronted with militant trade unions. Thus I find that more aggressive labor representation can hurt lower income earners.
