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Does Tax Competition Tame the Leviathan?

Brülhart, Marius and Mario Jametti ()
Authors registered in the RePEc Author Service: Marius Brülhart

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)
Date: 2007-10
New Economics Papers: this item is included in nep-acc, nep-cdm, nep-pbe, nep-pub and nep-ure
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Journal Article: Does tax competition tame the Leviathan? (2019) Downloads
Working Paper: Does Tax Competition Tame the Leviathan? (2007) Downloads
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