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Tax Competition and Tax Coordination in a Median Voter Model

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  • Clemens Fuest

    ()

  • Bernd Huber

    ()

Abstract

This paper analyzes the welfare effects of capital tax coordination in a simple model of fiscal competition where fiscal policy is subject to majority voting and households differ with respect to their labor and capital income. It turns out that a coordinated capital tax increase may raise or reduce welfare, depending on the relative magnitude of i) economic distortions induced by a labor tax and ii) political distortions resulting from the influence of the median voter on fiscal policy decisions. A negative welfare effect is more likely, the smaller the marginal excess burden of the labor tax and the smaller the ratio of the median voter's labor income to average labor income. We also use empirical estimates of the marginal excess burden of taxation to determine the welfare effects of tax coordination; it turns out that a negative welfare effect of coordinated tax increases may emerge in our model for empirically reasonable parameters. Copyright Kluwer Academic Publishers 2001

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Bibliographic Info

Article provided by Springer in its journal Public Choice.

Volume (Year): 107 (2001)
Issue (Month): 1 (April)
Pages: 97-113

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Handle: RePEc:kap:pubcho:v:107:y:2001:i:1:p:97-113

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Web page: http://www.springerlink.com/link.asp?id=100332

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Citations

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Cited by:
  1. Borck, Rainald, 2003. "Tax competition and the choice of tax structure in a majority voting model," Journal of Urban Economics, Elsevier, vol. 54(1), pages 173-180, July.
  2. Ihori, Toshihiro & Yang, C.C., 2009. "Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy," Journal of Urban Economics, Elsevier, vol. 66(3), pages 210-217, November.
  3. PERALTA, Susana & van YPERSELE, Tanguy, 2002. "Coordination of capital taxation among Asymmetric countries," CORE Discussion Papers 2002032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Haufler, Andreas & Klemm, Alexander & Schjelderup, Guttorm, 2009. "Economic integration and the relationship between profit and wage taxes," Munich Reprints in Economics 20403, University of Munich, Department of Economics.
  5. Rupayan Pal & Ajay Sharma, 2011. "Political competition and leadership in tax competition," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-024, Indira Gandhi Institute of Development Research, Mumbai, India.
  6. Leonzio Rizzo, 2010. "Interaction between federal taxation and horizontal tax competition: theory and evidence from Canada," Public Choice, Springer, vol. 144(1), pages 369-387, July.
  7. Atsushi Kawamoto, 2012. "An empirical analysis on intergovernmental strategic interaction in tax policy: Evidence from capital taxation in Japan," Discussion papers ron238, Policy Research Institute, Ministry of Finance Japan.
  8. Makris, Miltiadis, 2006. "Capital tax competition under a common currency," Journal of Urban Economics, Elsevier, vol. 59(1), pages 54-74, January.
  9. Koenig, Tobias & Wagener, Andreas, 2013. "Tax structure and government expenditures with tax equity concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 137-153.
  10. Rupayan Pal & Ajay Sharma, 2011. "Competition for foreign capital: Endogenous objective, public investment and tax," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2011-021, Indira Gandhi Institute of Development Research, Mumbai, India.
  11. Pal, Rupayan & Sharma, Ajay, 2013. "Endogenizing governments' objectives in tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 570-578.
  12. Toshihiro Ihori & C. C. Yang, 2008. "Interregional Tax Competition and Intraregional Political Competition: The Optimal Provision of Public Goods," CIRJE F-Series CIRJE-F-553, CIRJE, Faculty of Economics, University of Tokyo.

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