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Does Tax Competition Tame the Leviathan?

Author

Listed:
  • Mario Jametti

    (Department of Economics, York University)

  • Marius Brülhart

    (University of Lausanne)

Abstract
We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these e¤ects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating e¤ect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.

Suggested Citation

  • Mario Jametti & Marius Brülhart, 2007. "Does Tax Competition Tame the Leviathan?," Working Papers 2007_7, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2007_7
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    References listed on IDEAS

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    More about this item

    Keywords

    tax competition; optimal taxation; government preferences; fiscal federalism; direct democracy;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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