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Public Debt Asymmetries and Tax Competition

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Author Info
Signe Krogstrup (Institute of Economics, University of Copenhagen)

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Abstract

The paper investigates the effect of asymmetric debt and debt servicing obligations on taxes and primary spending in a standard tax competition model, assuming public debts are pre-determined and in their steady state. The impact of increasing financial market integration and capital mobility on tax and spending asymmetries is then investigated, and the results are tested empirically for EU countries. The model predicts that cross country asymmetries in debt servicing obligations lead to cross-country asymmetries in taxes and spending, and these predictions are supported by the data, with high-debt EU countries having lower expenditures and higher taxes than low-debt countries. Moreover, as the impact of increasing capital mobility on tax asymmetries is theoretically ambiguous and empirically insignificant, increasing capital mobility is found to amplify debt-induced tax distortion asymmetries. Finally, higher capital mobility is found to amplify public spending asymmetries theoretically as well as empirically across EU member countries.

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Publisher Info
Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 04-01.

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Length: 40 pages
Date of creation: Aug 2002
Date of revision: Dec 2003
Handle: RePEc:kud:epruwp:04-01

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Related research
Keywords: public debt; tax competition; European integration;

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H6 - Public Economics - - National Budget, Deficit, and Debt
F2 - International Economics - - International Factor Movements and International Business

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  1. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November. [Downloadable!] (restricted)
  3. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1995. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Perotti, Roberto & Kontopoulos, Yianos, 2002. "Fragmented fiscal policy," Journal of Public Economics, Elsevier, vol. 86(2), pages 191-222, November. [Downloadable!] (restricted)
  5. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September. [Downloadable!] (restricted)
  7. Bhargava, A & Franzini, L & Narendranathan, W, 1982. "Serial Correlation and the Fixed Effects Model," Review of Economic Studies, Blackwell Publishing, vol. 49(4), pages 533-49, October. [Downloadable!] (restricted)
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