Browsing by Subject "fiscal competition"

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  • Solanko, Laura (2001)
    The paper analyses effects of fiscal competition for mobile capital between identical regions in a transition economy. I add two features characteristic of transition economies into the familiar model of fiscal competition by Keen-Marchand (1997). Firstly, the economy is seen to consist of two sectors with differing productivities. Even though both sectors use same inputs, the new sector is more productive than the old one. Secondly, decision-makers are assumed to be only partially benevolent. They maximise a weighted average of consumer's utility and their private benefit that originates in the old sector production. The primary interest centers on the effects of fiscal competition on the overall level and on the composition of public goods provision when the economy is characterised by the above-mentioned transition features. Two specifications for decision-maker's private benefit will be used. The basic case corresponds closely to that in Keen-Marchand (1997) producing results largely in line with theirs. The level of public goods provision is proved to be too low in a competitive equilibrium. Additionally, the composition of public goods will be distorted towards too much infrastructure and too little social public good. A common increase in capital tax rates or a common change in the composition of public goods would unambigously increase consumer's welfare, but the welfare change is proven to be smaller than it would be in pure Keen-Marchand (1997) model. The alternative specification of decision-maker's private benefit may be seen as a special case of the one used in Qian-Roland (1998). As it is assumed that politicans own state sector rents, the results change radically. It is no longer self-evident that too little public goods is provided in a competitive equilibrium and a common policy change may, in fact, be welfare-deterioring for the consumers. Specifically, when the relative share of old sector production in a region is large, a common increase in tax on mobile capital may decrease consumer's welfare. The opposite is proven to hold if the production structure of the transition economy (i.e. the relative share of old sector production) is very close to a standard one-sector economy.
  • Erholm, Juha (2006)
    The European Union has taken down internal borders in Europe to allow for the free movement of people, companies, goods and services. Yet EU member states retain great liberty in setting their own tax levels and public systems. As mobility causes public economies to take the external situation into consideration when setting tax and public expenditure policies, this new setting can encourage fiscal competition between EU member states and lower income redistribution levels in the EU. This thesis examines this setting from the perspective of how labour mobility can cause fiscal competition. In recent decades, labour mobility in Europe has been quite low. This can be expected to change, however, partly because of the May 2004 enlargement of the EU. Wildasin (1991) models a combined federal and local system with federal subsidies and local income redistribution, with only the poor being allowed to move. In equilibrium local jurisdictions end up with the same income redistribution as all other local jurisdictions. Hindriks (1999) examines a setting where independent jurisdictions compete fiscally, attracting the rich and deterring the poor. Particularly the mobility of the rich is detrimental to income redistribution. Also the mobility of the poor has in most cases a negative effect. Jurisdictions can compete either in taxes, transfers or both in taxes and transfers, with competition in transfers having the strongest effect on income redistribution. Tax and income redistribution reasons are not currently the biggest cause to migrate in the EU. Despite this, expecting labour mobility levels to go up European nations will have to consider labour mobility induced fiscal competition as possibly limiting public policy in the future.