The paper analyzes a multi-country extension of the Barro model of productive public expenditure. In the presence of infrastructural externalities between countries the provision of infrastructure will be inefficiently low if countries do not coordinate. This provides a role for a supra-national body, such as the EU, to coordinate the policies of the individual governments. It is shown how the supranational body can ensure the efficient level of infrastructure provision and, as a result, obtain an increased rate of growth. The results of the paper also show how capital flows between countries act to equalize growth rates. This can help explain why there is limited empirical evidence for tax rates causing a difference in growth rates between countries. This is not the same as saying taxation does not affect growth: if production requires public infrastructure then taxation is needed for growth. The flow of capital acts to distribute the benefit of this across countries.
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Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures R53 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock
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