The Effects of Tax Competition when Politicians Create Rents to Buy Political Support

Wolfgang Eggert and Peter Birch Sørensen
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Peter Birch Sørensen: Department of Economics, University of Copenhagen

No 07-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

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.

Keywords: tax competition; rent seeking; probabilistic voting (search for similar items in EconPapers)
JEL-codes: D72 D73 H87 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2007-12
New Economics Papers: this item is included in nep-cdm, nep-pbe, nep-pol and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The effects of tax competition when politicians create rents to buy political support (2008)
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