Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104354
Authors: 
Hendel, Ulrich
Year of Publication: 
2012
Series/Report no.: 
Munich Discussion Paper 2012-21
Abstract: 
Common tax competition models suggest that welfare states will undercut each other's tax rate to attract taxpayers and keep welfare recipients at bay. This will lead to a zero-taxation outcome in the absence of migration costs or other barriers to migration. This paper develops a two-country framework with mobile altruistic taxpayers and immobile welfare recipients. It shows that under the assumption of taxpayers motivated by warm glow altruism, tax competition leads to unique pure strategy Nash equilibria in taxation which are different from zero given sufficiently strong altruistic preferences. If countries are asymmetric with respect to the number of welfare recipients, pure altruism and inequity aversion preferences support additional unique pure strategy Nash equilibria in which the country with the fewer poor attracts more taxpayers and sets higher taxes. This implies that rich countries may benefit from tax competition.
Subjects: 
tax competition
welfare state
altruism
JEL: 
H73
D64
H20
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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