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Does Tax Competition Tame the Leviathan?

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  • Mario Jametti

    ()
    (Department of Economics, York University)

  • Marius Brülhart

    ()
    (University of Lausanne)

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:yca:wpaper:2007_7

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

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References

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Citations

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Cited by:
  1. Mario Jametti & Marcelin Joanis, 2011. "Electoral Competition as a Determinant of Fiscal Decentralization," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 1107, USI Università della Svizzera italiana.
  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.
  3. Beatrix Eugster & Raphaël Parchet, 2011. "Culture and Taxes: Towards Identifying Tax Competition," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 11.05, Université de Lausanne, Faculté des HEC, DEEP.
  4. Kangsik, Choi, 2009. "Endogenous Timing with Government's Preference and Privatization," MPRA Paper 13844, University Library of Munich, Germany.
  5. Joan Costa-i-Font & Filipe De-Albuquerque & Hristos Doucouliagos, 2011. "How significant are fiscal interactions in federations?: a meta-regression analysis," LSE Research Online Documents on Economics 37536, London School of Economics and Political Science, LSE Library.
  6. Luca Salvadori & José María Durán-Cabré & Alejandro Esteller-Moré, 2012. "Regional Competition On Tax Administration," ERSA conference papers ersa12p184, European Regional Science Association.
  7. Emilie CALDEIRA, 2010. "Yardstick competition in a Federation: Theory and Evidence from China," Working Papers 201018, CERDI.
  8. Mario Jametti, 2014. "Weathering the Global Financial Crisis - Is Direct Democracy of any Help?," IdEP Economic Papers 1405, USI Università della Svizzera italiana.
  9. Kangsik, Choi, 2009. "Privatization, Government's Preference and Unionization Structure: A Mixed Oligopoly Approach," MPRA Paper 13028, University Library of Munich, Germany.
  10. Nicole Aregger & Martin Brown & Enzo Rossi, 2013. "Transaction Taxes, Capital Gains Taxes and House Prices," Working Papers 2013-02, Swiss National Bank.
  11. Mario Jametti, 2014. "Tax Competition and Direct Democracy in Local Public Finance - Empirical Work on Switzerland," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 12(1), pages 12-17, 04.

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