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Competitive Nonlinear Taxation and Constitutional Choice

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  • Massimo Morelli
  • Huanxing Yang
  • Lixin Ye

Abstract

In an economy where agents are characterized by different productivities (vertical types) and different abilities to move (horizontal types), we compare a unified nonlinear optimal taxation schedule with the equilibrium taxation schedule that would be chosen by two competing tax authorities if the same economy were divided into two States. The overall level of progressivity and redistribution is unambiguously lower under competitive taxation than under unified taxation; the “rich” are always in favor of competing authorities and local governments, whereas the “poor” are always in favor of unified taxation. The constitutional choice between fiscal regimes depends on the preferences of the middle class, which in turn depend on the initial conditions in terms of the distribution of abilities (incomes), the relative power of the various classes, and mobility costs. In particular, as mobility increases, it becomes increasingly likely that a reform in the direction of unification of fiscal policies in a federation will receive majority support, while a decreased average wealth can have the opposite effect.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2010/14.

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Date of creation: 2010
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Handle: RePEc:eui:euiwps:eco2010/14

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Keywords: Competitive nonlinear taxation; Mobility; Integration; Inequality; Type preferencesover institutions.;

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Citations

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Cited by:
  1. Vilen Lipatov & Alfons Weichenrieder, 2012. "Optimal income taxation with tax competition," Working Papers, Oxford University Centre for Business Taxation 1207, Oxford University Centre for Business Taxation.
  2. Craig Brett & John Weymark, 2008. "Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility," Vanderbilt University Department of Economics Working Papers 0812, Vanderbilt University Department of Economics.
  3. Etienne Lehmann & Laurent Simula & Alain Trannoy, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," CESifo Working Paper Series 4351, CESifo Group Munich.
  4. Laurent Simula & Alain Trannoy, 2011. "Shall we Keep the Highly Skilled at Home? The Optimal Income Tax Perspective," CESifo Working Paper Series 3326, CESifo Group Munich.
  5. Guiso, Luigi & Herrera, Helios & Morelli, Massimo, 2013. "A Culture Based Theory of Fiscal Union Desirability," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 138, Competitive Advantage in the Global Economy (CAGE).
  6. Roc Armenter & Francesc Ortega, 2010. "Credible Redistributive Policies and Migration across US States," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 403-423, April.
  7. Laurent Simula, 2013. "Tax Competition and Migration," 2013 Meeting Papers, Society for Economic Dynamics 1126, Society for Economic Dynamics.
  8. Luigi Guiso & Helios Herrera & Massimo Morelli, 2013. "A Cultural Clash View of the EU Crisis," EIEF Working Papers Series 1321, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2013.
  9. Simula, Laurent & Trannoy, Alain, 2010. "Optimal income tax under the threat of migration by top-income earners," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 163-173, February.
  10. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2011. "Labor Migration and the Case for Flat Tax," CESifo Working Paper Series 3471, CESifo Group Munich.
  11. Luque, Jaime & Morelli, Massimo & Tavares, José, 2011. "Fiscal Union Consensus Design under the Risk of Autarky," CEPR Discussion Papers 8552, C.E.P.R. Discussion Papers.
  12. José Tavares, 2012. "Fiscal Union Consensus Design Under The Threat Of Autarky," 2012 Meeting Papers, Society for Economic Dynamics 202, Society for Economic Dynamics.

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