Fiscal competition and public debt

Eckhard Janeba and Maximilian Todtenhaupt

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper explores the implications of high indebtedness for strategic tax setting when capital markets are integrated. When public borrowing is constrained due to sovereign default or by a binding fiscal rule, a rise in a country's initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that jurisdiction, while the opposite occurs elsewhere. On net a jurisdiction with higher initial debt becomes a less attractive location. Our analysis is inspired by fiscal responses in severely hit countries after the economic and financial crisis which are consistent with the theoretical predictions. We find a similar pattern on the sub-national level using administrative data from the universe of German municipalities.

Date: 2018
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Citations: View citations in EconPapers (5)

Published in Journal of Public Economics 168(2018): pp. 47-61

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Related works:
Journal Article: Fiscal competition and public debt (2018)
Working Paper: Fiscal Competition and Public Debt (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenar:62861

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