The effects of tax competition when politicians create rents to buy political support
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The effects of tax competition when politicians create rents to buy political support. / Eggert, Wolfgang; Sørensen, Peter Birch.
In: Journal of Public Economics, Vol. 92, No. 5-6, 2008, p. 1142-1163.Research output: Contribution to journal › Journal article › Research › peer-review
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TY - JOUR
T1 - The effects of tax competition when politicians create rents to buy political support
AU - Eggert, Wolfgang
AU - Sørensen, Peter Birch
N1 - JEL classification: D72, H73, H87
PY - 2008
Y1 - 2008
N2 - We set up a probabilistic voting model to explore the hypothesis that tax competition improves public sector efficiency and social welfare. In the absence of tax base mobility, distortions in the political process induce vote-maximising politicians to create rents to public sector employees. Allowing tax base mobility may be welfare-enhancing up to a point, because the ensuing tax competition will reduce rents. However, if tax competition is carried too far, it will reduce welfare by causing an underprovision of public goods. Starting from an equilibrium where tax competition has eliminated all rents, a coordinated rise in capital taxation will always be welfare-improving. For plausible parameter values it will even be welfare-enhancing to carry tax coordination beyond the point where rents to public sector workers start to emerge
AB - We set up a probabilistic voting model to explore the hypothesis that tax competition improves public sector efficiency and social welfare. In the absence of tax base mobility, distortions in the political process induce vote-maximising politicians to create rents to public sector employees. Allowing tax base mobility may be welfare-enhancing up to a point, because the ensuing tax competition will reduce rents. However, if tax competition is carried too far, it will reduce welfare by causing an underprovision of public goods. Starting from an equilibrium where tax competition has eliminated all rents, a coordinated rise in capital taxation will always be welfare-improving. For plausible parameter values it will even be welfare-enhancing to carry tax coordination beyond the point where rents to public sector workers start to emerge
KW - Faculty of Social Sciences
U2 - 10.1016/j.jpubeco.2007.12.002
DO - 10.1016/j.jpubeco.2007.12.002
M3 - Journal article
VL - 92
SP - 1142
EP - 1163
JO - Journal of Public Economics
JF - Journal of Public Economics
SN - 0047-2727
IS - 5-6
ER -
ID: 3863071