Does Tax Competition Raise Voter Welfare?

30 Pages Posted: 24 Jan 2002

See all articles by Timothy J. Besley

Timothy J. Besley

London School of Economics & Political Science (LSE) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Michael Smart

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

Date Written: January 2002

Abstract

Economists who believe that government is essentially benevolent tend to regard inter-governmental competition as a source of negative externalities that lower welfare. In contrast the public choice perspective, particularly that motivated by the Leviathan model, sees such competition as potentially beneficial. This Paper considers a world consisting of politicians of both kinds - self-interested and welfare maximizing. Imperfect information prevents identification of the latter. We model the political equilibrium of the model and then examine the consequences of introducing competition for mobile resources or yardstick competition. In both cases there is a trade-off between effects on politician discipline and selection. Contrary to the existing view, we show that competition is most likely to be welfare improving for voters when it is more likely that politicians are benevolent and bad for welfare when it is most likely that politicians are of the rent seeking type.

JEL Classification: D70, H10

Suggested Citation

Besley, Timothy J. and Smart, Michael, Does Tax Competition Raise Voter Welfare? (January 2002). CEPR Discussion Paper No. 3131. Available at SSRN: https://ssrn.com/abstract=298047

Timothy J. Besley (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Michael Smart

University of Toronto - Department of Economics ( email )

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Institute for Policy Analysis
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Canada
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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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