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Decentralization and International Tax Competition

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  • John Wilson
  • Eckhard Janeba

Abstract

This paper models tax competition between two countries that are divided into regions. In the first stage of the game, the strategy variable for each country is the division of the provision of a continuum of public goods between the central and regional governments. In the second stage, the central and regional governments choose their tax rates on capital. A country’s decentralization level serves as a strategic tool through its influence on the mix of horizontal and vertical externalities that exist under tax competition. In contrast to standard tax competition models, decentralizing the provision of public goods may be welfare-enhancing.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 854.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_854

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References

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  1. 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.
  2. Persson, Torsten & Tabellini, Guido, 1992. "The Politics of 1992: Fiscal Policy and European Integration," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(4), pages 689-701, October.
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  4. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 97-139, October.
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  6. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 363-370, March.
  7. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
  8. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, Elsevier, vol. 89(7), pages 1157-1189, July.
  9. Besley, Timothy J. & Coate, Stephen, 2000. "Centralized versus Decentralized Provision of Local Public Goods: a Political Economy Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2495, C.E.P.R. Discussion Papers.
  10. 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.
  11. Jan K. Brueckner & Luz A. Saavedra, 2000. "Do Local Governments Engage in Strategic Property-Tax Competition?," Econometric Society World Congress 2000 Contributed Papers 0357, Econometric Society.
  12. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, Elsevier, vol. 87(12), pages 2611-2637, December.
  13. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  14. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  16. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, Springer, vol. 4(4), pages 407-427, November.
  17. Wilson, John Douglas, 2005. "Welfare-improving competition for mobile capital," Journal of Urban Economics, Elsevier, vol. 57(1), pages 1-18, January.
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Citations

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Cited by:
  1. Bob Chirinko & Daniel J. Wilson, 2007. "Tax competition among U.S. states: racing to the bottom or riding on a seesaw?," Working Paper Series, Federal Reserve Bank of San Francisco 2008-03, Federal Reserve Bank of San Francisco.
  2. Mario Jametti & Marius Brülhart, 2007. "Does Tax Competition Tame the Leviathan?," Working Papers, York University, Department of Economics 2007_7, York University, Department of Economics.
  3. Lisa Grazzini & Alessandro Petretto, 2007. "Tax Competition between Unitary and Federal Countries," Economics of Governance, Springer, Springer, vol. 8(1), pages 17-36, January.
  4. Zissimos, Ben & Wooders, Myrna, 2008. "Public good differentiation and the intensity of tax competition," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1105-1121, June.
  5. Antonio Sciala' & Paolo Liberati, 2008. "The impact of economic openness on the vertical structure of the public sector," "Marco Fanno" Working Papers 0085, Dipartimento di Scienze Economiche "Marco Fanno".
  6. Marcelin Joanis, 2008. "Intertwined Federalism: Accountability Problems under Partial Decentralization," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 08-22, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  7. Libman, Alexander, 2005. "Взаимодействие Государственных И Частных Структур В Интеграционных Группировах: Теоретические Подходы И Оп," MPRA Paper 17044, University Library of Munich, Germany.
  8. Gordon, Roger H. & Cullen, Julie Berry, 2012. "Income redistribution in a Federal system of governments," Journal of Public Economics, Elsevier, Elsevier, vol. 96(11), pages 1100-1109.
  9. Juan Luis Jiménez & Javier Campos, 2004. "Efectos de la descentralización de la política de defensa de la competencia," Documentos de trabajo conjunto ULL-ULPGC, Facultad de Ciencias Económicas de la ULPGC 2004-09, Facultad de Ciencias Económicas de la ULPGC.
  10. Pi, Jiancai & Zhou, Yu, 2014. "Tax competition in federations revisited," Economics Letters, Elsevier, Elsevier, vol. 123(1), pages 104-107.
  11. Janeba, Eckhard & Wilson, John Douglas, 2011. "Optimal fiscal federalism in the presence of tax competition," Journal of Public Economics, Elsevier, Elsevier, vol. 95(11), pages 1302-1311.
  12. Adams, Laurel & Régibeau, Pierre & Rockett, Katharine, 2014. "Incentives to create jobs: Regional subsidies, national trade policy and foreign direct investment," Journal of Public Economics, Elsevier, Elsevier, vol. 111(C), pages 102-119.
  13. Oliver Lorz & Gerald Willmann, 2008. "Enlargement versus Deepening: The Trade-off Facing Economic Unions," CESifo Working Paper Series 2455, CESifo Group Munich.
  14. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," Center for European, Governance and Economic Development Research Discussion Papers 163, University of Goettingen, Department of Economics.
  15. Libman, Alexander, 2004. "Мировой Опыт Оптимизации Налогообложения: Роль Налоговой Конкуренции И Оффшорных Центров Ð’ Мировом ХозяйстÐ," MPRA Paper 17042, University Library of Munich, Germany.
  16. Baskaran, Thushyanthan, 2013. "Identifying local tax mimicking: Administrative borders and a policy reform," Center for European, Governance and Economic Development Research Discussion Papers 157, University of Goettingen, Department of Economics.
  17. Kimiko Terai, 2008. "Interregional Disparities in Productivity and the Choice of Fiscal Regime," Working Papers 070813, University of California-Irvine, Department of Economics.
  18. Oliver Lorz & Gerald Willmann, 2013. "Size versus scope: on the trade-off facing economic unions," International Tax and Public Finance, Springer, Springer, vol. 20(2), pages 247-267, April.
  19. Ernesto Crivelli & Christian Volpe Martincus, 2007. "Horizontal and Vertical Tax Externalities in a Multicountry World," Bonn Econ Discussion Papers, University of Bonn, Germany bgse8_2007, University of Bonn, Germany.

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