The name is absent

Figure 1: The borderline between welfare-increasing and welfare-reducing tax
competition (I)

fare rises above the autarky level, because the positive effect of rent destruction
dominates the negative effect of lower public goods provision. However, as the
number of countries increases from eight to nine, implying an increase in the tax
base elasticity from 0.4682 to 0.4737, the welfare gain from tax competition is
turned into a slight loss, as the negative efficiency effect of reduced public service
provision starts to dominate. Indeed, in this particular example the maximum
welfare gain from tax competition is attained already when the number of coun-
tries is two, at a tax base elasticity of about 0.3. Given our calibration, this tax
base elasticity represents the optimal intensity of tax competition.

Of course these results are sensitive to the choice of parameter values. One
critical parameter is the degree of political distortion, δ . As the value of this
parameter increases, it takes a higher intensity of tax competition - reflected in
the number of countries and the associated elasticity of the tax base - before
the negative welfare effect of reduced public goods provision starts to dominate
the positive welfare effect of rent destruction. This is illustrated in figures 1
and 2 which show the combinations of the political distortion and the number
of competing jurisdictions (and the implied tax base elasticity) that will lead to
exactly the same level of welfare as that attained under autarky, given the other
parameter values stated in the note to Table 1. For parameter combinations above

22

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