Why Europe Should Love Tax Competition - and the U.S. Even More so

40 Pages Posted: 15 Nov 2002 Last revised: 30 Oct 2010

See all articles by Eckhard Janeba

Eckhard Janeba

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

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: November 2002

Abstract

Is global competition for mobile capital harmful (less public goods) or beneficial (less government waste)? This paper combines both aspects within a generalized version of the comparative public finance model (Persson, Roland and Tabellini, 2000) by introducing multiple countries and endogenous tax bases. We consider the role of political institutions and compare parliamentary democracies (Europe) and presidential-congressional systems (USA) to show that increasing tax competition is likely to improve voter welfare, even if public good supply decreases because rents to politicians also fall. The conditions for voter welfare to improve are less stringent under the presidential-congressional system than under parliamentary democracies. Increasing tax competition lowers voter welfare if the only benefit to politicians is to divert resources from the government budget and the future is valued highly.

Suggested Citation

Janeba, Eckhard and Schjelderup, Guttorm, Why Europe Should Love Tax Competition - and the U.S. Even More so (November 2002). NBER Working Paper No. w9334. Available at SSRN: https://ssrn.com/abstract=351426

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

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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