How Large are the Welfare Costs of Tax Competition?

Ian Parry

RFF Working Paper Series from Resources for the Future

Abstract: Previous literature has shown that competition among regional governments may lead to inefficiently low levels of capital taxation, because governments do not take account of the external benefits of capital flight to other regions. However, the fiscal distortion is smaller the more elastic the supply of capital (for the region bloc), if governments are not perfectly competitive, or they behave in part as a revenue-maximizing Leviathan. There has been very little empirical work on the magnitude of the welfare effects of fiscal competition. This paper presents extensive calculations of the welfare effects using a model that incorporates the possibility of Leviathan behavior, strategic behavior by governments, monopsony power in factor markets, and a wide range of capital supply elasticities. The welfare costs of tax competition are generally fairly small, and even these costs can disappear fairly quickly when some weight is attached to the possibility of Leviathan behavior.

Keywords: fiscal competition; tax harmonization; welfare costs; Leviathan; strategic behavior (search for similar items in EconPapers)
JEL-codes: H21 H23 H73 (search for similar items in EconPapers)
Date: 2001-06-01
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: How large are the welfare costs of tax competition? (2003)
Working Paper: How Large Are the Welfare Costs of Tax Competition? (2001)
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