Scandinavian Working Papers in Economics

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

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

Eckhard Janeba () and Guttorm Schjelderup ()
Additional contact information
Eckhard Janeba: Dept. of Economics, University of Mannheim, Postal: University of Mannheim, Department of Economics, L 7, 3 - 5 , 68131 Mannheim, Germany
Guttorm Schjelderup: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: H24

28 pages, October 17, 2008

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