The Welfare Effects of Tax Competition Reconsidered: Politicians and Political Institutions
30 Pages Posted: 23 Oct 2008
Date Written: October 17, 2008
The views on the welfare effects of tax competition differ widely. Some see the fiscal externalities as the cause for underprovision of public goods, while others see tax competition as means to reduce government inefficiencies. Using a comparative politics approach we show that tax competition among presidential-congressional democracies is typcially welfare improving, while harmful among parliamentary democracies if under the latter the marginal benefit of the public good is sufficiently high. The results hold when politicians seek re-election because of exogenous benefits of holding office. By contrast, when politicians hold office only to extract rents, tax competition is harmful if politicians are sufficiently patient.
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