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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2008/22:
The Welfare Effects of Tax Competition Reconsidered: Politicians and Political Institutions

Eckhard Janeba () and Guttorm Schjelderup ()

Abstract: The views on the welfare effects of tax competition differ widely. Some see the fiscal externalities as the cause for underprovision of public goods, while others see tax competition as means to reduce government inefficiencies. Using a comparative politics approach we show that tax competition among presidential-congressional democracies is typically welfare improving, while harmful among parliamentary democracies if under the latter the marginal benefit of the public good is sufficiently high. The results hold when politicians seek re-election because of exogenous benefits of holding office. By contrast, when politicians hold office only to extract rents, tax competition is harmful if politicians are sufficiently patient.

Keywords: Tax competition; welfare effects; comparative politics approach; (follow links to similar papers)

JEL-Codes: H24; (follow links to similar papers)

28 pages, October 17, 2008

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