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Corporate Lobbying and Commitment Failure in Capital Taxation

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  • Nicolas Marceau
  • Michael Smart

Abstract

This paper investigates the effects of lobbying by corporations when investments are irreversible and government cannot commit to tax policies. We show that industries which rely more heavily on sunk capital lobby more vigorously and are generally more successful in obtaining tax breaks. Thus lobbying can mitigate the capital levy problem. Nevertheless, these industries invest less in long-run equilibrium than more flexible ones. We then consider the effects of relaxing legal restrictions on corporate lobbying. When the deadweight costs of lobbying fall, taxes on sunk capital tend to fall, but political contributions may rise, as lobbyists compete more intensively for political favors. On balance, a ban of lobbying may therefore cause investment to rise or fall.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 676.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_676

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  1. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(1), pages 1-31, February.
  2. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 752-69, August.
  3. Jaewoo Lee & Michelle R. Garfinkel, 2000. "Political Influence and the Dynamic Consistency of Policy," American Economic Review, American Economic Association, vol. 90(3), pages 649-666, June.
  4. Besley, Timothy & Coate, Stephen, 2001. "Lobbying and Welfare in a Representative Democracy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 67-82, January.
  5. Stephen Coate & Stephen Morris, . ""Policy Persistence ''," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 95-19, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  6. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-77, September.
  7. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers, Tel Aviv 21-92, Tel Aviv.
  8. Persson, Torsten & Tabellini, Guido, 1994. "Representative democracy and capital taxation," Journal of Public Economics, Elsevier, vol. 55(1), pages 53-70, September.
  9. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December.
  10. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  11. Nicolas Marceau & Michael Smart, 2000. "Business Tax Lobbying," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 102, CREFE, Université du Québec à Montréal.
  12. Laussel, Didier & Le Breton, Michel, 2001. "Conflict and Cooperation: The Structure of Equilibrium Payoffs in Common Agency," Journal of Economic Theory, Elsevier, vol. 100(1), pages 93-128, September.
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