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The effects of tax competition when politicians create rents to buy political support

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  • Eggert, Wolfgang
  • Sørensen, Peter Birch
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    Abstract

    We set up a probabilistic voting model to explore the hypothesis that tax competition improves public sector efficiency and social welfare. In the absence of tax base mobility, distortions in the political process induce vote-maximising politicians to create rents to public sector employees. Allowing tax base mobility may be welfare-enhancing up to a point, because the ensuing tax competition will reduce rents. However, if tax competition is carried too far, it will reduce welfare by causing an underprovision of public goods. Starting from an equilibrium where tax competition has eliminated all rents, a coordinated rise in capital taxation will always be welfare-improving. For plausible parameter values it will even be welfare-enhancing to carry tax coordination beyond the point where rents to public sector workers start to emerge.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Public Economics.

    Volume (Year): 92 (2008)
    Issue (Month): 5-6 (June)
    Pages: 1142-1163

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    Handle: RePEc:eee:pubeco:v:92:y:2008:i:5-6:p:1142-1163

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    Web page: http://www.elsevier.com/locate/inca/505578

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    Cited by:
    1. Eichner, Thomas & Runkel, Marco, 2011. "Corporate income taxation of multinationals in a general equilibrium model," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 723-733, August.
    2. Manmohan S. Kumar & Dennis P. Quinn, 2012. "Globalization and Corporate Taxation," IMF Working Papers 12/252, International Monetary Fund.
    3. Osterloh, Steffen & Debus, Marc, 2012. "Partisan politics in corporate taxation," European Journal of Political Economy, Elsevier, vol. 28(2), pages 192-207.
    4. Lai, Yu-Bong, 2010. "The political economy of capital market integration and tax competition," European Journal of Political Economy, Elsevier, vol. 26(4), pages 475-487, December.
    5. Per G. Fredriksson & Xenia Matschke & Jenny Minier, 2008. "Environmental Policy in Majoritarian Systems," Working papers 2008-01, University of Connecticut, Department of Economics, revised Sep 2009.

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