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Tax competition and governmental efficiency: Theory and evidence

  • Maksym Ivanyna
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    This paper studies the impact of a government's efficiency on the taxation policy of a state. Namely, we claim that the countries are different both in the way they tax capital and the way they spend the collected revenue. We build a model of 2 countries competing for foreign investment, government of one of them is more efficient than the other one, which means that it is able to produce more public good out of the same revenue. We show that the country with the more efficient government will charge higher income tax from firms. The theoretical predictions are then tested on a sample of OECD countries, years 1996-2005. In general, empirical results are in line with the theory.

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    File URL: http://www.bgpe.de/texte/DP/059_ivanyna.pdf
    File Function: First version, 2008
    Download Restriction: no

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 059.

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    Length: 34 pages
    Date of creation: Jun 2008
    Date of revision:
    Handle: RePEc:bav:wpaper:059_ivanyna
    Contact details of provider: Web page: http://www.bgpe.de/

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    1. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
    2. Beata K. Smarzynska, 2003. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages," William Davidson Institute Working Papers Series 548, William Davidson Institute at the University of Michigan.
    3. Kind, Hans Jarle & Knarvik, Karen Helene Midelfart & Schjelderup, Guttorm, 2000. "Competing for capital in a 'lumpy' world," Journal of Public Economics, Elsevier, vol. 78(3), pages 253-274, November.
    4. Bucovetsky, S., 2005. "Public input competition," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1763-1787, September.
    5. Zissimos, Ben & Wooders, Myrna, 2008. "Public good differentiation and the intensity of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1105-1121, June.
    6. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    7. Barankay, Iwan & Lockwood, Ben, 2006. "Decentralization and the Productive Efficiency of Government: Evidence from Swiss Cantons," IZA Discussion Papers 2477, Institute for the Study of Labor (IZA).
    8. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    9. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    10. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    11. Bucovetsky, Sam & Haufler, Andreas, 2007. "Preferential tax regimes with asymmetric countries," Munich Reprints in Economics 19976, University of Munich, Department of Economics.
    12. Borck, Rainald & Pfluger, Michael, 2006. "Agglomeration and tax competition," European Economic Review, Elsevier, vol. 50(3), pages 647-668, April.
    13. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
    14. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    15. Jan K. Brueckner, 2003. "Strategic Interaction Among Governments: An Overview of Empirical Studies," International Regional Science Review, SAGE Publishing, vol. 26(2), pages 175-188, April.
    16. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR;CES;MSH, vol. 22, pages 385-430, 04.
    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. Kenneth Stewart & Michael Webb, 2006. "International competition in corporate taxation: evidence from the OECD time series," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 153-201, 01.
    19. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, March.
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