Tax versus Transfer Competition
In a context where both the poor and the rich are (imperfectly) mobile, this paper compares the Nash equilibrium levels of income redistribution from the rich to the poor when jurisdictions compete either in taxes, in transfers or both. Although taxes and transfers are linked through the budget-balanced requirement, the analysis reveals intriguing differences. Indeed, it turns out that transfer competition results in much less redistribution than tax competition, while tax-transfer competition involves an intermediate level of redistribution. In each approach, the mobility of the rich is detrimental to redistribution and an increase in the dependency ratio reduces taxes.
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