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How Large are the Welfare Costs of Tax Competition?

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  • Parry, Ian

    (Resources for the Future)

Abstract

Previous literature has shown that competition among regional governments may lead to inefficiently low levels of capital taxation, because governments do not take account of the external benefits of capital flight to other regions. However, the fiscal distortion is smaller the more elastic the supply of capital (for the region bloc), if governments are not perfectly competitive, or they behave in part as a revenue-maximizing Leviathan. There has been very little empirical work on the magnitude of the welfare effects of fiscal competition. This paper presents extensive calculations of the welfare effects using a model that incorporates the possibility of Leviathan behavior, strategic behavior by governments, monopsony power in factor markets, and a wide range of capital supply elasticities. The welfare costs of tax competition are generally fairly small, and even these costs can disappear fairly quickly when some weight is attached to the possibility of Leviathan behavior.

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  • Parry, Ian, 2001. "How Large are the Welfare Costs of Tax Competition?," Discussion Papers dp-01-28, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-01-28
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    Cited by:

    1. Oates, Wallace, 2001. "A Reconsideration of Environmental Federalism," Discussion Papers dp-01-54, Resources For the Future.
    2. 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.
    3. De Borger, B. & Proost, S. & Van Dender, K., 2005. "Congestion and tax competition in a parallel network," European Economic Review, Elsevier, vol. 49(8), pages 2013-2040, November.
    4. Batina, Raymond G., 2009. "Local capital tax competition and coordinated tax reform in an overlapping generations economy," Regional Science and Urban Economics, Elsevier, vol. 39(4), pages 472-478, July.
    5. Hannes Winner, 2005. "Has Tax Competition Emerged in OECD Countries? Evidence from Panel Data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(5), pages 667-687, September.
    6. Duc Hong Vo, 2010. "The Economics Of Fiscal Decentralization," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 657-679, September.
    7. Satoshi Kasamatsu & Hikaru Ogawa, 2020. "International capital market and repeated tax competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 751-768, June.
    8. Yvon Rocaboy, 2006. "Qui paie la ville ? Logique et efficacité du système de financement," Revue d'Économie Financière, Programme National Persée, vol. 86(5), pages 99-110.
    9. Bruno De Borger & Wilfried Pauwels, 2010. "A Nash bargaining solution to models of tax and investment competition: tolls and investment in serial transport corridors," Working Papers 2010/1, Institut d'Economia de Barcelona (IEB).
    10. Thierry Madiès & Sonia Paty & Yvon Rocaboy, 2005. "Les stratégies fiscales des collectivités locales. De la théorie à la réalité," Revue de l'OFCE, Presses de Sciences-Po, vol. 94(3), pages 283-315.
    11. Oates, Wallace E., 2001. "Fiscal Competition or Harmonization? Some Reflections," National Tax Journal, National Tax Association, vol. 54(n. 3), pages 507-12, September.
    12. Lars P Feld, 2004. "On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy," Marburg Working Papers on Economics 200425, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    13. Oates, Wallace E., 2001. "Fiscal Competition or Harmonization? Some Reflections," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(3), pages 507-512, September.
    14. Petchey, Jeffrey D. & Shapiro, Perry, 2009. "Equilibrium in fiscal competition games from the point of view of the dual," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 97-108, January.
    15. Huang, Wei Hong & Chen, Yang & Rudkin, Simon, 2014. "Dynamic Fiscal competition with public infrastructure investment: Austerity and attracting capital inflow," RIEI Working Papers 2014-03, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration, revised 02 Mar 2016.
    16. Leon Bettendorf & Joeri Gorter & Albert van der Horst, 2006. "Who benefits from tax competition in the European Union?," CPB Document 125, CPB Netherlands Bureau for Economic Policy Analysis.
    17. Hendrik Vrijburg & Ruud A. Mooij, 2016. "Tax rates as strategic substitutes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 2-24, February.

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    More about this item

    Keywords

    fiscal competition; tax harmonization; welfare costs; Leviathan; strategic behavior;
    All these keywords.

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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