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Redistribution, Fiscal Competition, and the Politics of Economic Integration

  • Anke S. Kessler
  • Christoph L�lfesmann
  • Gordon M. Myers

The paper examines the consequences of the economic integration of factor markets in a model with two countries that redistribute income among their residents. The social benefits in each country are financed by a source based tax on capital which is democratically chosen by its inhabitants. If either capital or labour is internationally mobile, the countries engage in fiscal competition and the partial integration of capital or labour markets is detrimental to the countries' redistributive ability. A move from partial to full integration, however, may alleviate rather than intensify fiscal competition, particularly, if the two countries face sufficiently similar economic and political conditions. In such a situation, for example, tax competition for mobile capital is softened as the labour market becomes more integrated and even vanishes if both factors are fully mobile. As a result, there is more redistribution in equilibrium and a majority of the population in each country is strictly better off. Copyright 2002, Wiley-Blackwell.

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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 69 (2002)
Issue (Month): 4 ()
Pages: 899-923

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Handle: RePEc:oup:restud:v:69:y:2002:i:4:p:899-923
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  1. Myers & G.M., 1989. "Optimality, Free Mobility And The Regional Authority In Federation," Working Papers 10, John Deutsch Institute for the Study of Economic Policy.
  2. Perotti, Roberto, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 755-76, October.
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  8. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  9. Wildasin, D.E., 1987. "Nash equilibria in models of fiscal competition," CORE Discussion Papers 1987020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Cremer, H. & Pestieau, P., . "Distributive implications of European integration," CORE Discussion Papers RP -1237, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
  12. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
  13. Bucovetsky, S., 1995. "Rent seeking and tax competition," Journal of Public Economics, Elsevier, vol. 58(3), pages 337-363, November.
  14. Keen, Michael, 1987. "Welfare effects of commodity tax harmonisation," Journal of Public Economics, Elsevier, vol. 33(1), pages 107-114, June.
  15. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  16. Persson, Torsten & Tabellini, Guido, 1992. "The Politics of 1992: Fiscal Policy and European Integration," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 689-701, October.
  17. Wilson, John Douglas, 1987. "Trade, Capital Mobility, and Tax Competition," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 835-56, August.
  18. Burbidge, John B. & Myers, Gordon M., 1994. "Population mobility and capital tax competition," Regional Science and Urban Economics, Elsevier, vol. 24(4), pages 441-459, August.
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