The effects of tax competition when politicians create rents to buy political support

TY - JOUR

T1 - The effects of tax competition when politicians create rents to buy political support

AU - Eggert, Wolfgang

AU - Sørensen, Peter Birch

N1 - JEL classification: D72, H73, H87

PY - 2008

Y1 - 2008

N2 - We set up a probabilistic voting model to explore the hypothesis that tax competition improves public sector efficiency and social welfare. In the absence of tax base mobility, distortions in the political process induce vote-maximising politicians to create rents to public sector employees. Allowing tax base mobility may be welfare-enhancing up to a point, because the ensuing tax competition will reduce rents. However, if tax competition is carried too far, it will reduce welfare by causing an underprovision of public goods. Starting from an equilibrium where tax competition has eliminated all rents, a coordinated rise in capital taxation will always be welfare-improving. For plausible parameter values it will even be welfare-enhancing to carry tax coordination beyond the point where rents to public sector workers start to emerge

AB - We set up a probabilistic voting model to explore the hypothesis that tax competition improves public sector efficiency and social welfare. In the absence of tax base mobility, distortions in the political process induce vote-maximising politicians to create rents to public sector employees. Allowing tax base mobility may be welfare-enhancing up to a point, because the ensuing tax competition will reduce rents. However, if tax competition is carried too far, it will reduce welfare by causing an underprovision of public goods. Starting from an equilibrium where tax competition has eliminated all rents, a coordinated rise in capital taxation will always be welfare-improving. For plausible parameter values it will even be welfare-enhancing to carry tax coordination beyond the point where rents to public sector workers start to emerge

KW - Faculty of Social Sciences

U2 - 10.1016/j.jpubeco.2007.12.002

DO - 10.1016/j.jpubeco.2007.12.002

M3 - Journal article

SN - 0047-2727

VL - 92

SP - 1142

EP - 1163

JO - Journal of Public Economics

JF - Journal of Public Economics

IS - 5-6

ER -