Does Tax Competition Really Promote Growth?

28 Pages Posted: 2 Oct 2007

See all articles by Marko Köthenbürger

Marko Köthenbürger

ETH Zurich - Department of Management, Technology and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ben Lockwood

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2007

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.

Keywords: tax competition, uncertainty, stochastic growth

JEL Classification: H77, E62, F43

Suggested Citation

Köthenbürger, Marko and Lockwood, Ben, Does Tax Competition Really Promote Growth? (September 2007). CESifo Working Paper No. 2102, Available at SSRN: https://ssrn.com/abstract=1018592 or http://dx.doi.org/10.2139/ssrn.1018592

Marko Köthenbürger (Contact Author)

ETH Zurich - Department of Management, Technology and Economics ( email )

Leonhardstrasse 21
Zurich, 8092
Switzerland
+41 44 6325446 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ben Lockwood

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8906 (Phone)
+44 24 7657 2548 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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