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Choosing Club Membership under Tax Competition and Free Riding

  • Hyun Park
  • Apostolis Philippopoulos
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    We study the choice of club membership, when member-countries’ national governments set their tax policies non-cooperatively. Federal policy (in the form of club membership) has a higher constitutional status than national policies (in the form of income tax rates). This allows federal policy to reduce the inefficiencies arising from uncoordinated national policies. We show that equilibrium membership decreases with any factors that generate Nash-type inefficiencies; growing capital mobility is one such factor. In the particular case in which these inefficiencies take the form of tax competition for mobile tax bases and free riding on other countries’ contribution to international public goods, one can rationalize the formation of very small economic unions only. The normative result is that union enlargement requires a switch from uncoordinated to coordinated national fiscal policies.

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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 985.

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    Date of creation: 2003
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    Handle: RePEc:ces:ceswps:_985
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    1. Persson, Torsten & Tabellini, Guido, 1995. "Double-edged incentives: Institutions and policy coordination," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 38, pages 1973-2030 Elsevier.
    2. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
    3. 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.
    4. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete over Corporate Tax Rates?," CEPR Discussion Papers 3400, C.E.P.R. Discussion Papers.
    5. Caplan, Arthur J. & Cornes, Richard C. & Silva, Emilson C. D., 2000. "Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility," Journal of Public Economics, Elsevier, vol. 77(2), pages 265-284, August.
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