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Tax Competition in a Fiscal Union with Decentralized Leadership

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  • Marko Koethenbuerger

Abstract

This paper examines capital tax competition in the presence of an interstate transfer policy without federal commitment. Lack of commitment implies that tax policy is chosen prior to federal transfers. The paper’s main result is that ex-post federal policy internalizes horizontal fiscal externalities, insulating tax policy from capital mobility. Federal policy, however, introduces a new source of inefficiency unrelated to tax competition. Specifically, ex-post transfer payments prove to be equivalent to an interstate revenue-sharing system which may render federal intervention in the presence of fiscal externalities welfare-deteriorating relative to tax competition.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 943.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_943

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Keywords: federalism; capital tax competition; commitment; soft budget constraints;

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References

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  1. WILDASIN, David E., . "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," CORE Discussion Papers RP -831, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Citations

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Cited by:
  1. Kothenburger, Marko, 2007. "Ex-post redistribution in a federation: Implications for corrective policy," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 481-496, April.
  2. Thomas Aronsson Aronsson & Thomas Jonsson & Tomas Sjögren, 2006. "Environmental Policy and Optimal Taxation in a Decentralized Economic Federation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 437-454, September.
  3. Robin Boadway & Jean-Francois Tremblay, 2006. "A Theory of Vertical Fiscal Imbalance," Working Papers 1072, Queen's University, Department of Economics.
  4. Allers, Maarten A. & Toolsema, Linda A., 2012. "Welfare financing: Grant allocation and efficiency," Research Report 12004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  5. Marie-Laure Breuillé & Thierry Madiès & Emmanuelle Taugourdeau, 2007. "Fiscal federalism and soft budget constraint: does the nature of public spending matter?," EconomiX Working Papers 2007-16, University of Paris West - Nanterre la Défense, EconomiX.
  6. Zarko Y. Kalamov, 2012. "Prudent Fiscal Policy in the Presence of Bailout Expectations," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(4), pages 365-382, December.
  7. Marko Köthenbürger, 2007. "Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment," CESifo Working Paper Series 2054, CESifo Group Munich.
  8. Shun-ichiro Bessho & Kimiko Terai, 2008. "Competition for Private Capital and Central Grants: The Case of Japanese Industrial Parks," Working Papers 080909, University of California-Irvine, Department of Economics.
  9. Breuillé, Marie-Laure & Vigneault, Marianne, 2010. "Overlapping soft budget constraints," Journal of Urban Economics, Elsevier, vol. 67(3), pages 259-269, May.
  10. Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, vol. 64(3), pages 551-559, November.
  11. Aronsson, Thomas, 2010. "Optimal income taxation and decentralized fiscal federalism," Regional Science and Urban Economics, Elsevier, vol. 40(4), pages 187-195, July.
  12. Nobuo Akai & Motohiro Sato, 2005. "leadership meets soft budget," CIRJE F-Series CIRJE-F-391, CIRJE, Faculty of Economics, University of Tokyo.
  13. Aronsson, Thomas & Persson, Lars, 2012. "Decentralized fiscal federalism revisited: Optimal income taxation and public goods under horizontal leadership," Economics Letters, Elsevier, vol. 117(1), pages 223-226.
  14. Yongzheng Liu, 2014. "Does competition for capital discipline governments? The role of fiscal equalization," International Tax and Public Finance, Springer, vol. 21(3), pages 345-374, June.
  15. Breuillé, Marie-Laure & Madiès, Thierry & Taugourdeau, Emmanuelle, 2010. "Gross versus net equalization scheme in a federation with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 68(2), pages 205-214, September.
  16. Arthur Caplan & Emilson Silva, 2011. "Impure public goods, matching grant rates and income redistribution in a federation with decentralized leadership and imperfect labor mobility," International Tax and Public Finance, Springer, vol. 18(3), pages 322-336, June.

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