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Tax Competition and Tax Coordination in a Median Voter Model

  • Fuest, Clemens
  • Huber, Bernd

This paper analyzes the welfare effects of capital tax coordination in a simple model of fiscal competition where fiscal policy is subject to majority voting and households differ with respect to their labor and capital income. It turns out that a coordinated capital tax increase may raise or reduce welfare, depending on the relative magnitude of i) economic distortions induced by a labor tax and ii) political distortions resulting from the influence of the median voter on fiscal policy decisions. A negative welfare effect is more likely, the smaller the marginal excess burden of the labor tax and the smaller the ratio of the median voter's labor income to average labor income. We also use empirical estimates of the marginal excess burden of taxation to determine the welfare effects of tax coordination; it turns out that a negative welfare effect of coordinated tax increases may emerge in our model for empirically reasonable parameters. Copyright 2001 by Kluwer Academic Publishers

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Article provided by Springer in its journal Public Choice.

Volume (Year): 107 (2001)
Issue (Month): 1-2 (April)
Pages: 97-113

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Handle: RePEc:kap:pubcho:v:107:y:2001:i:1-2:p:97-113
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  1. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  2. Fuest, Clemens, 2000. "The Political Economy of Tax Coordination as a Bargaining Game between Bureaucrats and Politicians," Public Choice, Springer, vol. 103(3-4), pages 357-82, June.
  3. WILDASIN, David E., . "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," CORE Discussion Papers RP 831, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  9. Frey, Bruno S. & Eichenberger, Reiner, 1996. "To harmonize or to compete? That's not the question," Journal of Public Economics, Elsevier, vol. 60(3), pages 335-349, June.
  10. Haufler, Andreas, 1997. "Factor taxation, income distribution and capital market integration," Munich Reprints in Economics 20390, University of Munich, Department of Economics.
  11. Werner W. Pommerehne & Bruno S. Frey, 1976. "Two Approaches To Estimating Public Expenditures," Public Finance Review, SAGE Publishing, vol. 4(4), pages 395-407, October.
  12. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  13. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  14. Coates, Dennis, 1993. "Tax Competition Among Jurisdictions With Public and Private Employment," National Tax Journal, National Tax Association, vol. 46(2), pages 177-89, June.
  15. GRAZZINI, Lisa & van YPERSELE, Tanguy, 1997. "Tax harmonisation and political competition," CORE Discussion Papers 1997054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  17. Fullerton, Don, 1991. "Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 302-08, March.
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