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Public Debt Asymmetries and Tax Competition

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  • Signe Krogstrup

    (Institute of Economics, University of Copenhagen)

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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Bibliographic 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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Keywords: public debt; tax competition; European integration;

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  1. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  2. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  3. 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.
  4. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  6. Perotti, Roberto & Kontopoulos, Yianos, 2002. "Fragmented fiscal policy," Journal of Public Economics, Elsevier, vol. 86(2), pages 191-222, November.
  7. 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.
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