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Fiscal Competition and Public Debt

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  • Eckhard Janeba
  • Maximilian Todtenhaupt

Abstract

The implications of high indebtedness for strategic tax setting in internationally integrated capital markets have found little attention so far. We analyze when and how changes in initial debt levels affect the distribution of economic activity across space. When public borrowing is constrained, a rise in a country’s initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that country, while the opposite occurs elsewhere. On net a country with higher initial debt becomes a less attractive location. Our model is consistent with the observation that highly indebted countries have decreased corporate tax rates over-proportionally. It sheds light on proposals to devolve taxing power to lower levels of governments which differ in initial debt levels.

Suggested Citation

  • Eckhard Janeba & Maximilian Todtenhaupt, 2016. "Fiscal Competition and Public Debt," CESifo Working Paper Series 6155, CESifo.
  • Handle: RePEc:ces:ceswps:_6155
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    3. Séverine MENGUY, 2019. "Does public indebtedness constrain or can it favor economic growth? A simple analytical modeling," Bulletin of Applied Economics, Risk Market Journals, vol. 6(2), pages 1-29.
    4. Arcalean, Calin, 2018. "Dynamic fiscal competition: A political economy theory," Journal of Public Economics, Elsevier, vol. 164(C), pages 211-224.
    5. Ryo Arawatari & Tetsuo Ono, 2023. "International coordination of debt rules with time‐inconsistent voters," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 29-60, February.

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    More about this item

    Keywords

    asymmetric tax competition; business tax; sovereign debt; inter-jurisdictional tax competition;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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