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Choosing Club Membership under Tax Competition and Free Riding

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  • Hyun Park
  • Apostolis Philippopoulos
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    Abstract

    We study the choice of club membership, when member-countries’ national governments set their tax policies non-cooperatively. Federal policy (in the form of club membership) has a higher constitutional status than national policies (in the form of income tax rates). This allows federal policy to reduce the inefficiencies arising from uncoordinated national policies. We show that equilibrium membership decreases with any factors that generate Nash-type inefficiencies; growing capital mobility is one such factor. In the particular case in which these inefficiencies take the form of tax competition for mobile tax bases and free riding on other countries’ contribution to international public goods, one can rationalize the formation of very small economic unions only. The normative result is that union enlargement requires a switch from uncoordinated to coordinated national fiscal policies.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 985.

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    Date of creation: 2003
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    Handle: RePEc:ces:ceswps:_985

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    Keywords: clubs; capital mobility; federalism;

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    1. Persson, Torsten & Tabellini, Guido, 1995. "Double-edged incentives: Institutions and policy coordination," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 38, pages 1973-2030 Elsevier.
    2. Caplan, Arthur J. & Cornes, Richard C. & Silva, Emilson C. D., 2000. "Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility," Journal of Public Economics, Elsevier, Elsevier, vol. 77(2), pages 265-284, August.
    3. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    4. Persson, Torsten & Tabellini, Guido, 1991. "The Politics of 1992: Fiscal Policy and European Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 501, C.E.P.R. Discussion Papers.
    5. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 441-63, August.
    6. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521477185.
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    Cited by:
    1. Libman, Alexander Mikhailovich, 2009. "Эндогенные Границы И Распределение Власти В Федерациях И Международных Сообществах
      [ENDOGENOUS BOUNDARIES AND DISTRIBUTION O
      ," MPRA Paper 16473, University Library of Munich, Germany.

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