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Tax Competition, Elastic Labor Supply, and Growth

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  • Ulrich Hange

Abstract

In this paper we investigate the effects of tax competition in a simple endogenous growth model with elastic labor supply. Our analysis focuses on two issues. First, we show that all taxes, i.e. on capital, labor, and consumption, are harmful for growth. Second, we derive the optimal tax policy. A regional government chooses an inefficiently low tax rate on mobile capital in the presence of tax competition. In contrast, the tax rates on labor income and consumption are always set in order not to distort the consumption-leisure choice.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2338.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2338

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Keywords: tax competition; endogenous growth; elastic labor;

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  1. Fuest, Clemens & Huber, Bernd, 2001. "Labor and capital income taxation, fiscal competition, and the distribution of wealth," Journal of Public Economics, Elsevier, Elsevier, vol. 79(1), pages 71-91, January.
  2. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  3. Koskela, Erkki & Schöb, Ronnie, 2001. "Optimal Factor Income Taxation in the Presence of Unemployment," Discussion Papers, The Research Institute of the Finnish Economy 758, The Research Institute of the Finnish Economy.
  4. Stephen J. Turnovsky, 1999. "Fiscal Policy and Growth in a Small Open Economy with Elastic Labor Supply," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 32(5), pages 1191-1214, November.
  5. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521630351.
  6. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  7. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
  8. Michael Rauscher, 2005. "Economic Growth and Tax-Competing Leviathans," International Tax and Public Finance, Springer, Springer, vol. 12(4), pages 457-474, August.
  9. Brueckner, Jan K, 1999. " Fiscal Federalism and Capital Accumulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 205-24.
  10. Brueckner, Jan K., 2006. "Fiscal federalism and economic growth," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 2107-2120, November.
  11. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 64, pages 416.
  12. Arjan Lejour & Harrie Verbon, 1997. "Tax Competition and Redistribution in a Two-Country Endogenous-Growth Model," International Tax and Public Finance, Springer, Springer, vol. 4(4), pages 485-497, November.
  13. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, Elsevier, vol. 40(8), pages 1521-1540, November.
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