IDEAS home Printed from https://ideas.repec.org/p/yca/wpaper/2007_7.html
   My bibliography  Save this paper

Does Tax Competition Tame the Leviathan?

Author

Listed:
  • Mario Jametti

    (Department of Economics, York University)

  • Marius Brülhart

    (University of Lausanne)

Abstract

We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these e¤ects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating e¤ect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.

Suggested Citation

  • Mario Jametti & Marius Brülhart, 2007. "Does Tax Competition Tame the Leviathan?," Working Papers 2007_7, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2007_7
    as

    Download full text from publisher

    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2007/Leviathan79.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Timothy Besley & Anne Case, 2003. "Political Institutions and Policy Choices: Evidence from the United States," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 7-73, March.
    2. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    3. Frey, Bruno S & Stutzer, Alois, 2000. "Happiness, Economy and Institutions," Economic Journal, Royal Economic Society, vol. 110(466), pages 918-938, October.
    4. Nelson, Michael A, 1987. "Searching for Leviathan: Comment and Extension," American Economic Review, American Economic Association, vol. 77(1), pages 198-204, March.
    5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    6. Caroline M. Hoxby, 2000. "Does Competition among Public Schools Benefit Students and Taxpayers?," American Economic Review, American Economic Association, vol. 90(5), pages 1209-1238, December.
    7. Keen, Michael J. & Kotsogiannis, Christos, 2004. "Tax competition in federations and the welfare consequences of decentralization," Journal of Urban Economics, Elsevier, vol. 56(3), pages 397-407, November.
    8. Wilson, John Douglas & Janeba, Eckhard, 2005. "Decentralization and international tax competition," Journal of Public Economics, Elsevier, vol. 89(7), pages 1211-1229, July.
    9. Oates, Wallace E, 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, American Economic Association, vol. 75(4), pages 748-757, September.
    10. Feld, Lars P. & Matsusaka, John G., 2003. "Budget referendums and government spending: evidence from Swiss cantons," Journal of Public Economics, Elsevier, vol. 87(12), pages 2703-2724, December.
    11. John A. List & Daniel M. Sturm, 2006. "How Elections Matter: Theory and Evidence from Environmental Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1249-1281.
    12. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521027922.
    13. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2010. "Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments," Southern Economic Journal, John Wiley & Sons, vol. 77(1), pages 27-48, July.
    14. Besley, Timothy & Coate, Stephen, 2008. "Issue Unbundling via Citizens' Initiatives," Quarterly Journal of Political Science, now publishers, vol. 3(4), pages 379-397, December.
    15. Harvey S. Rosen, 1988. "Fiscal Federalism: Quantitative Studies," NBER Books, National Bureau of Economic Research, Inc, number rose88-1.
    16. Epple, Dennis & Nechyba, Thomas, 2004. "Fiscal decentralization," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 55, pages 2423-2480, Elsevier.
    17. Oriana Bandiera & Andrea Prat & Tommaso Valletti, 2009. "Active and Passive Waste in Government Spending: Evidence from a Policy Experiment," American Economic Review, American Economic Association, vol. 99(4), pages 1278-1308, September.
    18. Farnham, Paul G, 1990. "The Impact of Citizen Influence on Local Government Expenditure," Public Choice, Springer, vol. 64(3), pages 201-212, March.
    19. Carlo Perroni & Kimberley A. Scharf, 2001. "Tiebout with Politics: Capital Tax Competition and Constitutional Choices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 133-154.
    20. Romer, Thomas & Rosenthal, Howard, 1982. "Median Voters or Budget Maximizers: Evidence from School Expenditure Referenda," Economic Inquiry, Western Economic Association International, vol. 20(4), pages 556-578, October.
    21. Michael Keen & Christos Kotsogiannis, 2003. "Leviathan and Capital Tax Competition in Federations," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 177-199, April.
    22. Brennan,Geoffrey & Buchanan,James M., 1980. "The Power to Tax," Cambridge Books, Cambridge University Press, number 9780521233293.
    23. John G. Matsusaka, 2005. "Direct Democracy Works," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 185-206, Spring.
    24. Schwartz, Aba, 1973. "Interpreting the Effect of Distance on Migration," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1153-1169, Sept.-Oct.
    25. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
    26. Forbes, Kevin F & Zampelli, Ernest M, 1989. "Is Leviathan a Mythical Beast?," American Economic Review, American Economic Association, vol. 79(3), pages 568-577, June.
    27. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    28. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September.
    29. John Joseph Wallis & Wallace E. Oates, 1988. "Decentralization in the Public Sector: An Empirical Study of State and Local Government," NBER Chapters, in: Fiscal Federalism: Quantitative Studies, pages 5-32, National Bureau of Economic Research, Inc.
    30. Matsusaka, John G., 2004. "For the Many or the Few," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226510811, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brulhart, Marius & Jametti, Mario, 2006. "Vertical versus horizontal tax externalities: An empirical test," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2027-2062, November.
    2. Lars Feld, 2014. "James Buchanan’s theory of federalism: from fiscal equity to the ideal political order," Constitutional Political Economy, Springer, vol. 25(3), pages 231-252, September.
    3. Paolo Liberati & Agnese Sacchi, 2013. "Tax decentralization and local government size," Public Choice, Springer, vol. 157(1), pages 183-205, October.
    4. Lars P. Feld & Jan Schnellenbach & Christoph A Schaltegger, 2004. "On Government Centralization and Fiscal Referendums: A Theoretical Model and Evidence from Switzerland," Marburg Working Papers on Economics 200419, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    5. Bruno S. Frey & Alois Stutzer, "undated". "The Role of Direct Democracy and Federalism in Local Power," IEW - Working Papers 209, Institute for Empirical Research in Economics - University of Zurich.
    6. Krishanu Karmakar & Jorge Martinez-Vazquez, 2014. "Fiscal Competition versus Fiscal Harmonization: A Review of the Arguments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1431, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Jorge Martinez-Vazquez & Ming-Hung Yao, 2009. "Fiscal Decentralization and Public Sector Employment: A Cross-Country Analysis," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0903, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    8. Lars P. Feld & Gebhard Kirchgässner & Christoph A. Schaltegger, 2010. "Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments," Southern Economic Journal, John Wiley & Sons, vol. 77(1), pages 27-48, July.
    9. Gebhard Kirchgassner, 2002. "The effects of fiscal institutions on public finance: a survey of the empirical evidence," Chapters, in: Stanley L. Winer & Hirofumi Shibata (ed.), Political Economy and Public Finance, chapter 9, Edward Elgar Publishing.
    10. Jorge Martinez-Vazquez & Ming-Hung Yao, 2009. "Fiscal Decentralization and Public Sector Employment," Public Finance Review, , vol. 37(5), pages 539-571, September.
    11. Zareh Asatryan, 2016. "The indirect effects of direct democracy: local government size and non-budgetary voter initiatives in Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 580-601, June.
    12. Feld, Lars P. & Schaltegger, Christoph A. & Schnellenbach, Jan, 2008. "On government centralization and fiscal referendums," European Economic Review, Elsevier, vol. 52(4), pages 611-645, May.
    13. George Crowley & Russell Sobel, 2011. "Does fiscal decentralization constrain Leviathan? New evidence from local property tax competition," Public Choice, Springer, vol. 149(1), pages 5-30, October.
    14. Stefan Voigt, 2011. "Positive constitutional economics II—a survey of recent developments," Public Choice, Springer, vol. 146(1), pages 205-256, January.
    15. Hoyt, William H., 1999. "Leviathan, local government expenditures, and capitalization," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 155-171, March.
    16. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    17. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," University of Göttingen Working Papers in Economics 163, University of Goettingen, Department of Economics.
    18. John G. Matsusaka, 2018. "Public policy and the initiative and referendum: a survey with some new evidence," Public Choice, Springer, vol. 174(1), pages 107-143, January.
    19. Kellermann, Kersten & Schlag, Carsten-Henning, 2012. "Small, Smart, Special: Der Mikrostaat Liechtenstein und sein Budget," KOFL Working Papers 13, Konjunkturforschungsstelle Liechtenstein (KOFL), Vaduz.
    20. Crivelli, Ernesto & Volpe Martincus, Christian, 2007. "Horizontal and Vertical Tax Externalities in a Multicountry World," Bonn Econ Discussion Papers 8/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).

    More about this item

    Keywords

    tax competition; optimal taxation; government preferences; fiscal federalism; direct democracy;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:yca:wpaper:2007_7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Support (email available below). General contact details of provider: https://edirc.repec.org/data/dyorkca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.