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Does Tax Competition Tame the Leviathan?

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Author Info
Mario Jametti () (Department of Economics, York University)
Marius Brülhart () (University of Lausanne)

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Abstract

We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these e¤ects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating e¤ect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.

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Paper provided by York University, Department of Economics in its series Working Papers with number 2007_7.

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Length: 38 pages
Date of creation: Sep 2007
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Handle: RePEc:yca:wpaper:2007_7

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Related research
Keywords: tax competition; optimal taxation; government preferences; fiscal federalism; direct democracy;

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
H7 - Public Economics - - State and Local Government; Intergovernmental Relations
D7 - Microeconomics - - Analysis of Collective Decision-Making

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kangsik, Choi, 2009. "Endogenous Timing with Government's Preference and Privatization," MPRA Paper 13844, University Library of Munich, Germany. [Downloadable!]
  2. Choi, Kangsik, 2009. "Government's Preference and Timing of Endogenous Wage Setting: Perspectives on Privatization and Mixed Duopoly," MPRA Paper 17221, University Library of Munich, Germany. [Downloadable!]
  3. Kangsik, Choi, 2009. "Privatization, Government's Preference and Unionization Structure: A Mixed Oligopoly Approach," MPRA Paper 13028, University Library of Munich, Germany. [Downloadable!]
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