Does tax competition really promote growth?

Abstract

This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity, and capital taxes fund a public good which may be for …nal consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies "extreme" tax competition. Stochastic shocks imply that households face a portfolio choice problem, which may dampen down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth, consistent with the empirical evidence.

Federalism, taxation, and economic growth

“…Our work here centers on how competition for capital via taxation policies affects economic growth. 5 A similar mechanism is used in subsequent work by Köthenbürger andLockwood Köthenbürger andLockwood (2010 2010), which explicitly builds on the model developed here to consider the effects of region-specific shocks.…”

International Tax Competition and the Deficit Bias

“…Within the vast tax competition literature, 2 while few previous studies have looked at the dynamic effects of tax competition (e.g., Koethenbuerger and Lockwood 2010;Makris 2005;Wildasin 2003; Wildasin and Wilson 1996), they have not focused on equilibrium public debt in such environments. An exception is Jensen and Toma (1991).…”

Fiscal centralization versus decentralization: Growth and welfare effects of spillovers, Leviathan taxation, and capital mobility

“…A number of studies, such as Devereux and Mansoorian (1992), Lejour and Verbon (1997), Razin and Yuen (1999) and Koethenbuerger and Lockwood (2010), analyze the growth effect of tax competition versus tax coordination. Brueckner (1999Brueckner ( , 2006) considers a growth model with overlapping generations of households and shows that economic growth is higher under fiscal federalism.…”