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Does Tax Competition Really Promote Growth?

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  • Koethenbuerger, Marko

    (CES, University of Munich,)

  • Lockwood, Ben

    (Department of Economics, University of Warwick,)

Abstract

This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity, and capital taxes fund a public good which may be for final consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies “extreme” tax competition. Stochastic shocks imply that households face a portfolio choice problem, which may dampen down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth, consistent with the empirical evidence.

Suggested Citation

  • Koethenbuerger, Marko & Lockwood, Ben, 2007. "Does Tax Competition Really Promote Growth?," The Warwick Economics Research Paper Series (TWERPS) 810, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:810
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_810.pdf
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    Keywords

    tax competition ; uncertainty ; stochastic growth;

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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