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Tax competition and governmental efficiency: Theory and evidence

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  • Maksym Ivanyna

Abstract

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.

Suggested Citation

  • Maksym Ivanyna, 2008. "Tax competition and governmental efficiency: Theory and evidence," Working Papers 059, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:059_ivanyna
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    File URL: http://www.bgpe.de/texte/DP/059_ivanyna.pdf
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    References listed on IDEAS

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    5. Barankay, Iwan & Lockwood, Ben, 2007. "Decentralization and the productive efficiency of government: Evidence from Swiss cantons," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1197-1218, June.
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    8. 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.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    international taxation; public ¯nance; asymmetric equilibrium; tax competition;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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