Tax Competition and Leviathan with decentralized leadership

Steve Billon

Working Papers of LaRGE Research Center from Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg

Abstract: The traditional approach of public choice suggests that decentralization in the form of a fiercer competition may play an efficient constraint on the growth of self-interested governments. This paper analyzes the effect of decentralization on Leviathan state governments in the presence of intergovernmental grants provided by a federal layer. Under decentralized leadership, state governments strategically set their tax policy and wasteful consumption of public expenditures by anticipating the reaction of the federal government in terms of grants. The transfer scheme eliminates any incentive to engage in tax competition. However, it also creates an opportunity for state policy-makers to pass the financing of a part of their inefficient expenditures onto other members of the federation. In contrast to the conventional wisdom of public choice that focuses on simultaneous central and local decisions, increased competition in the decentralized leadership equilibrium might reduce citizens' welfare. Decentralization enhances the sharing of wasteful expenditures and the incentives to extract rents from tax revenues. The conditions under which more competition leads to higher wasteful expenditures and welfare worsening are derived.

Keywords: Federalism; Tax Competition; Decentralization; Government waste. (search for similar items in EconPapers)
JEL-codes: H1 H3 H7 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Tax Competition and Leviathan with Decentralized Leadership (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:lar:wpaper:2021-07

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