Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82080
Authors: 
Eggert, Wolfgang
Birch Sørensen, Peter
Year of Publication: 
2007
Series/Report no.: 
EPRU Working Paper Series 2007-04
Abstract: 
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.
Subjects: 
tax competition
rent seeking
probabilistic voting
JEL: 
D72
D73
H87
Document Type: 
Working Paper

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