Fiscal Competition and Public Debt

30 Pages Posted: 1 Dec 2016

See all articles by Eckhard Janeba

Eckhard Janeba

University of Mannheim - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Maximilian Todtenhaupt

Norwegian School of Economics (NHH); LMU Munich

Multiple version iconThere are 2 versions of this paper

Date Written: November 3, 2016

Abstract

The implications of high indebtedness for strategic tax setting in internationally integrated capital markets have found little attention so far. We analyze when and how changes in initial debt levels affect the distribution of economic activity across space. When public borrowing is constrained, a rise in a country’s initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that country, while the opposite occurs elsewhere. On net a country with higher initial debt becomes a less attractive location. Our model is consistent with the observation that highly indebted countries have decreased corporate tax rates over-proportionally. It sheds light on proposals to devolve taxing power to lower levels of governments which differ in initial debt levels.

Keywords: asymmetric tax competition, business tax, sovereign debt, inter-jurisdictional tax competition

JEL Classification: H250, H630, H730, H870

Suggested Citation

Janeba, Eckhard and Todtenhaupt, Maximilian, Fiscal Competition and Public Debt (November 3, 2016). CESifo Working Paper Series No. 6155. Available at SSRN: https://ssrn.com/abstract=2877657

Eckhard Janeba (Contact Author)

University of Mannheim - Department of Economics ( email )

L7, 3-5
D-68131 Mannheim
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Maximilian Todtenhaupt

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://https://sites.google.com/view/todtenhaupt

LMU Munich ( email )

Geschwister-Scholl-Platz 1
Munich, DE 80539
Germany

HOME PAGE: http://https://sites.google.com/view/todtenhaupt

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