Tax Competition Under Budget Rigidities and Fairness Norms

33 Pages Posted: 18 Aug 2004

See all articles by Thomas Pluemper

Thomas Pluemper

Vienna University of Economics and Business - Department of Socioeconomics; University of Essex - Department of Government

Vera E. Troeger

University of Essex - Department of Government

Hannes Winner

University of Salzburg - Department of Economics and Social Sciences; Austrian Institute of Economic Research (WIFO); University of Oxford - Oxford University Centre for Business Taxation; University of Innsbruck - Department of Economics & Statistics

Date Written: August 14, 2004

Abstract

This paper analyzes fiscal competition under budget rigidities and tax equity (fairness norms). We outline a numerically solvable political economic model that treats the outcome of tax competition as one argument in the governments utility function, the others being public expenditure and tax equity. In accordance with theoretical research, we demonstrate that tax competition tends to reduce taxes on mobile capital while increasing the tax rates on relatively immobile labor. However, taxes on mobile capital do not vanish in equilibrium. Instead, the government being least restricted by budget constraints and equity norms reduces tax rates slightly below the lowest tax rates of those countries, in which governments are more constrained. Analyzing data from 21 OECD countries between 1965 and 2000 we find empirical support for the hypotheses derived from our theoretical model.

Keywords: Political economy, tax competition, tax equity, public expenditure, fiscal policy, spatial panel econometrics

JEL Classification: H41, H87, D71, D72

Suggested Citation

Plümper, Thomas and Troeger, Vera E. and Winner, Hannes, Tax Competition Under Budget Rigidities and Fairness Norms (August 14, 2004). Available at SSRN: https://ssrn.com/abstract=577522 or http://dx.doi.org/10.2139/ssrn.577522

Thomas Plümper (Contact Author)

Vienna University of Economics and Business - Department of Socioeconomics ( email )

Vienna
Austria

University of Essex - Department of Government ( email )

Wivenhoe Park
Colchester, Essex CO4 3SQ
United Kingdom

HOME PAGE: http://www.polsci.org/pluemper

Vera E. Troeger

University of Essex - Department of Government ( email )

Wivenhoe Park
Colchester CO4 3SQ, CO4 3SQ
United Kingdom

Hannes Winner

University of Salzburg - Department of Economics and Social Sciences ( email )

Residenzplatz9
Salzburg, 5010
Austria

Austrian Institute of Economic Research (WIFO) ( email )

P.O. Box 91
Wien, A-1103
Austria

University of Oxford - Oxford University Centre for Business Taxation ( email )

Saïd Business School
Park End Street
Oxford, OX1 1HP
United Kingdom

University of Innsbruck - Department of Economics & Statistics ( email )

Universitatsstrasse 15
Innsbruck, A-6020
Austria

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