Does Tax Competition Tame the Leviathan?

Marius Brülhart and Mario Jametti ()

No 6512, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these effects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating effect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.

Keywords: direct democracy; fiscal federalism; government preferences; optimal taxation; tax competition (search for similar items in EconPapers)
JEL-codes: D7 H2 H7 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cdm, nep-pbe, nep-pub and nep-ure
Date: Written 2007-10
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Related works:
Working Paper: Does Tax Competition Tame the Leviathan? (2007)
Working Paper: Does Tax Competition Tame the Leviathan? (2007)
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