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Tax competition and political agency problems

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  • Satoshi Kasamatsu
  • Daiki Kishishita

Abstract

We study how politicians' reputation concerns affect taxation in the presence of intergovernmental competition. To this end, we construct a two‐country asymmetric tax competition model in which the residents in one of the two countries face a domestic political agency problem: the residents do not know whether the incumbent politician is benevolent or leviathan. To separate themselves from leviathan politicians and attract voters’ support, benevolent politicians argue for excessively low taxation, which can be regarded as anti‐taxation populism. This anti‐taxation populism exhibits the following two properties. First, the populist country's low production technology relative to the other country facilitates the emergence of anti‐taxation populism. Second, anti‐taxation populism can improve welfare in terms of either the populist country or the whole world, depending on the asymmetry of the production technology. Concurrence fiscale et problèmes d'action politique. En présence de concurrence intergouvernementale, nous étudions la façon dont les préoccupations de la classe politique en matière de réputation peuvent avoir une incidence sur la fiscalité. À cette fin, nous développons un modèle de concurrence fiscale asymétrique à deux pays. Dans l'un d'eux, les résidents sont confrontés à un problème d'action politique puisqu'ils ignorent si le politicien sortant est du type «bienveillant» ou «léviathan» (c'est‐à‐dire en faveur d'une optimisation des recettes fiscales). Afin de se dissocier des politiciens «léviathans» et s'assurer du soutien des électeurs, les politiciens «bienveillants» plaident pour une fiscalité excessivement faible. Cette approche s'apparentant à une forme de populisme «anti‐fiscalité» présente deux propriétés: elle est d'abord favorisée par les technologies peu productives du pays populiste par rapport à celles de l'autre pays, et peut ensuite améliorer le niveau de bien‐être soit dans le pays populiste, soit dans le monde entier en fonction de l'asymétrie des technologies de production.

Suggested Citation

  • Satoshi Kasamatsu & Daiki Kishishita, 2021. "Tax competition and political agency problems," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1782-1810, November.
  • Handle: RePEc:wly:canjec:v:54:y:2021:i:4:p:1782-1810
    DOI: 10.1111/caje.12569
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    1. Kishishita, Daiki & Yamagishi, Atsushi, 2021. "Contagion of populist extremism," Journal of Public Economics, Elsevier, vol. 193(C).

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