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How Much Are the Poor Losing From Tax Competition?

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  • Mathilde Muñoz

Abstract

This paper quantifies the unequal welfare effects of tax competition. I derive the optimal tax and transfer schedules in a free mobility union composed of countries that can either compete or set a uniform federal tax rate. In the absence of fiscal coordination, governments internalize that any decentralized tax reform can lead to the out-migration of taxpayers at the top of the income distribution while increasing the in-migration of transfer recipients. As a result, the optimal level of redistribution is always lower in the tax competition equilibrium. Numerical calibrations show that being in a competition union rather than in a federal union decreases poorer individuals’ welfare by up to -20 percent. In contrast, the rich experience higher welfare in the tax competition equilibrium due to lower tax rates.

Suggested Citation

  • Mathilde Muñoz, 2023. "How Much Are the Poor Losing From Tax Competition?," NBER Working Papers 31920, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31920
    Note: PE
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    More about this item

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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