Redistribution, income cum investment subsidy tax competition and capital flight in growing economies

Günther Rehme

No ECO 1995/16, Economics Working Papers from European University Institute

Abstract: This paper complements Rehme (1995) and reconsiders the tradeoff between growth and redistribution in a two-country world with endogenous growth, tax competition, and capital income cum investment subsidy tax scheme, perfect capital mobility, extreme investment behaviour, two classes in each country and governments with opposing preferences. It is shown that in a closed economy this tax scheme allows higher growth than a wealth tax scheme if the capital owners are sufficiently impatient. Also, a left-wing government's country grows faster than a right-wing government's one. In a two-country world with equal technological efficiency, no redistribution takes place and both countries act as left-wing governments for fear of capital flight. With efficiency differences the efficient country will always get all the capital. The rightwing government cannot use its domestically preferred policy. An efficient left-wing government can redistribute out of its efficiency advantage vis-a-vis a right or left-wing opponent and experience high growth. Efficient right and left-wing governments' countries grow at the same rate.

Date: 1995
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