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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
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100332

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  1. Haufler, Andreas, 1996. "Factor taxation, income distribution, and capital market integration," Discussion Papers, Series II 315, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  2. Massimo Bordignon & Paolo Manasse & Guido Tabellini, . "Optimal Regional Redistribution Under Asymmetric Information," Working Papers 93, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Pommerehne, Werner & Frey, Bruno S., 1975. "Two approaches to estimating public expenditures," Discussion Papers, Series I 65, University of Konstanz, Department of Economics.
  4. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  5. 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.
  6. 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).
  7. 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.
  8. Pommerehne, Werner W., 1978. "Institutional approaches to public expenditure : Empirical evidence from Swiss municipalities," Journal of Public Economics, Elsevier, vol. 9(2), pages 255-280, April.
  9. 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.
  10. Persson, Torsten & Tabellini, Guido, 1991. "The Politics of 1992: Fiscal Policy and European Integration," CEPR Discussion Papers 501, C.E.P.R. Discussion Papers.
  11. 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.
  12. 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.
  13. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  14. Martín Rama & Guido Tabellini, . "Lobbying by Capital and Labor over Trade and Labor Market Policies," Working Papers 94, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. 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.
  16. repec:cup:cbooks:9780521027922 is not listed on IDEAS
  17. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  18. 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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