Abstract

We present an economic rationale to explain why countries resort to foreign influence to export their ideology to other nations. Our model incorporates two fundamental elements: redistribution of tax burden between capital owners and workers, and international capital mobility. The model highlights the role of ideology in shaping both the taxes implemented by governments and the cross-border externalities of these policy choices. Pro-capital governments want to maximize returns to capital. Hence, they set lower capital taxes than pro-labor governments and benefit from other countries setting low capital taxes. In contrast, pro-labor governments' efforts to shift the tax burden onto domestic capital owners are facilitated by higher capital taxes abroad. These cross-border externalities create strong incentives to engage in foreign influence activities. We solve for a political equilibrium in which incumbent governments have the option to meddle in elections in other countries. In equilibrium, pro-capital parties exert influence aimed at promoting pro-capital parties and policies worldwide, while pro-labor governments carry out foreign influence activities aimed at boosting pro-labor parties and policies in other countries.