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Economic integration, tax erosion, and decentralisation: an empirical analysis

  • Francesca Gastaldi

    ()

    (University of Roma Sapienza)

  • Paolo Liberati

    ()

    (University of Roma Tre)

  • Antonio Sciala'

    ()

    (University of Roma Tre)

This paper addresses the issues of whether and how the degree of economic integration may affect central government tax revenues and the intensity of decentralisation. To this purpose, we empirically test the direct impact of economic integration on central tax revenues using the concept of implicit tax rates (ITRs) updated to take into account mobile and immobile capital taxation. On this basis we derive a country-specific measure of tax erosion that is used as a determinant of the decentralisation of the public sector in an Arellano-Bond environment. We find that: i) an increase of economic integration generates a downward pressure on ITRs on mobile capital, which is growing at increasing rates as far as economic integration increases; ii) the process of tax erosion gives rise to a corresponding process of increasing public sector decentralisation.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0127.

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Length: 25 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:pad:wpaper:0127
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