Public investment, taxation, and long-run output in economies with multi-level governments

Philip Bodman, Harry Campbell and Thanh Le

Economic Modelling, 2012, vol. 29, issue 5, 1603-1611

Abstract: This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.

Keywords: Fiscal decentralisation; Welfare versus revenue maximising governments; Output maximising tax rate; Tax competition; Tax sharing; Tax coordination (search for similar items in EconPapers)
JEL-codes: C71 C72 E13 E60 H77 O41 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:5:p:1603-1611

DOI: 10.1016/j.econmod.2012.05.002

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