Redistribution, wealth tax competition and capital flight in growing economies

Günther Rehme

No ECO 1995/09, Economics Working Papers from European University Institute

Abstract: This paper considers the trade-off between growth and redistribution policies in a two-country world with endogenous growth, tax competition, perfect capital mobility and extreme investment behaviour, two classes in each country and governments having opposing political preferences. It is shown that higher or lower growth when governments redistribute depends on their opponents when setting ta.xes. We find that the growth redistribution trade-off problem hinges on technological efficiency. If countries are equally efficient, no redistribution takes place, not even by two left-wing governments, for fear of capital flight. We show that redistribution is possible with a high growth rate as long as an efficiency gap can be maintained. This leads to capital flight for the inefficient country.

Date: 1995
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