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Fiscal competition and public debt

Eckhard Janeba and Maximilian Todtenhaupt

No 16-013, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of governments which differ in their initial debt levels.

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: 2016
New Economics Papers: this item is included in nep-eec, nep-pbe, nep-pub and nep-ure
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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https://www.econstor.eu/bitstream/10419/127470/1/847441180.pdf (application/pdf)

Related works:
Journal Article: Fiscal competition and public debt (2018) Downloads
Working Paper: Fiscal competition and public debt (2018)
Working Paper: Fiscal Competition and Public Debt (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:16013

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