Tax Competition, Elastic Labor Supply, and Growth

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Tax Competition, Elastic Labor Supply, and Growth

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Ulrich Hange ()

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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 CESifo Working Paper No. 2338.

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

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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