The Politics of 1992: Fiscal Policy and European Integration

Torsten Persson () and Guido Tabellini

No 3460, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The internal market in Europe will greatly increase the international mobility of resources. How will this affect fiscal policy in different countries? The first part of the paper considers taxation of capital in a two country model, where a democratically chosen government in each country chooses tax policy. Higher capital mobility changes the politico-economic equilibrium in two ways. On the one hand, it leads to more tax competition between the countries: this "economic effect" tends to lower both countries' tax rates. On the other hand, it alters voters' preferences and make them elect a different government: this "political effect" offsets the increased tax competition, although not completely so. The second part of the paper considers taxation of labor, in a model where labor is internationally immobile. Eliminating the remaining barriers' to trade in goals, changes the distribution of labor earnings in the economy, which again has a political, as well as an economic effect. And again the economic and political effects push the tax rates in different directions, but here the political effect can prevail. The tendency for an adapting political equilibrium to preserve the status quo, thus emerges as a general result of the paper.

Date: 1990-10
Note: ITI IFM
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Citations: View citations in EconPapers (4)

Published as Review of Economic Studies, Vol. 59 (1992): 689-702.

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Journal Article: The Politics of 1992: Fiscal Policy and European Integration (1992)
Working Paper: The Politics of 1992: Fiscal Policy and European Integration (1991)
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