Does Tax Competition Tame the Leviathan?

41 Pages Posted: 5 Jun 2008

See all articles by Marius Brülhart

Marius Brülhart

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Mario Jametti

University of Lugano


We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these effects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating effect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.

Keywords: direct democracy, fiscal federalism, government preferences, optimal taxation, tax competition

JEL Classification: D7, H2, H7

Suggested Citation

Brulhart, Marius and Jametti, Mario, Does Tax Competition Tame the Leviathan?. CEPR Discussion Paper No. DP6512, Available at SSRN:

Marius Brulhart (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
+41 21 692 3471 (Phone)
+41 21 692 3365 (Fax)


Mario Jametti

University of Lugano ( email )

Via Sole 14
CH-6904 Lugano, TN Ticino 6900
+41 58 666 4269 (Phone)


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