Why Europe should love tax competition - and the U.S. even more so

Abstract

Is global competition for mobile capital harmful (less public goods) or beneficial (less government waste)? This paper combines both aspects within a generalized version of the comparative public finance model (Persson, Roland and Tabellini, 2000) by introducing multiple countries and endogenous tax bases. We consider the role of political institutions and compare parliamentary democracies (Europe) and presidential-congressional systems (USA) to show that increasing tax competition is likely to improve voter welfare, even if public good supply decreases because rents to politicians also fall. The conditions for voter welfare to improve are less stringent under the presidential-congressional system than under parliamentary democracies. Increasing tax competition lowers voter welfare if the only benefit to politicians is to divert resources from the government budget and the future is valued highly.