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Tax Competition, Budget Rigidities, and Fairness Norms
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Tax Competition under Budget Rigidities and Fairness Norms
Thomas Plümper*, Vera E. Troeger
#
and Hannes Winner
+
* Department of Political Science, University of Konstanz # Max-Planck-Institute for Economic Systems, Jena + Department of Economics and Statistics, University of Innsbruck
Summary This paper analyses fiscal competition under budget rigidities and tax equity (fair-ness norms). We outline a numerically solvable political economic model that treats the outcome of tax competition as one argument in the governments utility function, the others being public expenditure and tax equity. In accordance with theoretical research, we demonstrate that tax competition tends to reduce taxes on mobile capital while increasing the tax rates on relatively immobile labor. How-ever, taxes on mobile capital do not vanish in equilibrium. Instead, the govern-ment being least restricted by budget constraints and equity norms reduces tax rates slightly below the lowest tax rates of those countries, in which governments are more constrained. Analyzing data from 21 OECD countries between 1965 and 2000 we find empirical support for our theoretical findings. JEL classification: H41, H87, D71, D72 Keywords: political economy; tax competition; tax equity; public expenditure; fiscal policy; spatial panel econometrics August 14
th
, 2004
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| | Authors: Pluemper, Thomas., Troeger, Vera. and Winner, Hannes. |
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1
Tax Competition under Budget Rigidities and Fairness Norms
Thomas Plümper*, Vera E. Troeger
#
and Hannes Winner
+
* Department of Political Science, University of Konstanz
# Max-Planck-Institute for Economic Systems, Jena
+ Department of Economics and Statistics, University of Innsbruck
Summary
This paper analyses fiscal competition under budget rigidities and tax equity (fair-
ness norms). We outline a numerically solvable political economic model that
treats the outcome of tax competition as one argument in the governments utility
function, the others being public expenditure and tax equity. In accordance with
theoretical research, we demonstrate that tax competition tends to reduce taxes on
mobile capital while increasing the tax rates on relatively immobile labor. How-
ever, taxes on mobile capital do not vanish in equilibrium. Instead, the govern-
ment being least restricted by budget constraints and equity norms reduces tax
rates slightly below the lowest tax rates of those countries, in which governments
are more constrained. Analyzing data from 21 OECD countries between 1965 and
2000 we find empirical support for our theoretical findings.
JEL classification: H41, H87, D71, D72
Keywords: political economy; tax competition; tax equity; public expenditure;
fiscal policy; spatial panel econometrics
August 14
th
, 2004
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