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Fiscal competition and public debt

Eckhard Janeba () and Maximilian Todtenhaupt

Journal of Public Economics, 2018, vol. 168, issue C, 47-61

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.

Keywords: Asymmetric tax competition; Business tax; Sovereign debt; Inter-jurisdictional tax competition (search for similar items in EconPapers)
JEL-codes: H25 H63 H73 H87 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Fiscal competition and public debt (2018)
Working Paper: Fiscal Competition and Public Debt (2016) Downloads
Working Paper: Fiscal competition and public debt (2016) Downloads
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