The name is absent



4. Tax coordination, rents and welfare

The analysis in the two previous sections showed that tax competition among
small jurisdictions has the potential to destroy rents completely, but in that case
it will also cause an underprovision of public goods which could be substantial.
This suggests that an internationally coordinated rise in taxation could be welfare-
improving even if the political process is biased in favour of public sector workers.
Thus, an interesting question is whether tax coordination will raise social welfare
and whether it will do so even if it leads to the emergence of rents? In this main
section we take a closer look at these issues, focusing on the case where individual
jurisdictions are small.

4.1. Tax coordination without rent creation

When the capital tax rate is fixed by some international agreement on tax coordin-
ation, politicians in the individual small country cannot influence
k = k (r + τ)
and w = w (r + τ ) since they now take τ as well as r as given. However, they
must still find the politically optimal combination of
W and α, subject to the
constraints (2.22) and (2.23). If a political candidate offers to raise the public
sector wage rate by the amount
dW, it follows from (2.1), (2.20) and (2.21) that
the resulting marginal political benefit (
MPB) in terms of the increase in the
probability of election victory will be

MPB = ipliu,g + (α - αi) PoUg] dW.                (4.1)

Since the tax rate is fixed by international agreement, a rise in the public sector
wage rate can only be financed through a cut in the number of public sector jobs
and hence in public goods provision. According to (2.1), (2.20) and (2.21), the
marginal political cost (the expected loss of votes) associated with a reduction
in public sector employment is

MPC = {[αiPi + (1 - αi)po] g (α) + Po (ug - up)} .        (4.2)

In the absence of constraints on wage-setting, an optimising politician will
want to equate the above expressions for the marginal political benefits and costs.
However, in a tax competition equilibrium where condition (3.3) holds, it follows

24



More intriguing information

1. The name is absent
2. Antidote Stocking at Hospitals in North Palestine
3. The name is absent
4. Dynamiques des Entreprises Agroalimentaires (EAA) du Languedoc-Roussillon : évolutions 1998-2003. Programme de recherche PSDR 2001-2006 financé par l'Inra et la Région Languedoc-Roussillon
5. The name is absent
6. CAPACITAÇÃO GERENCIAL DE AGRICULTORES FAMILIARES: UMA PROPOSTA METODOLÓGICA DE EXTENSÃO RURAL
7. Cardiac Arrhythmia and Geomagnetic Activity
8. The name is absent
9. Orientation discrimination in WS 2
10. The Impact of Financial Openness on Economic Integration: Evidence from the Europe and the Cis
11. A MARKOVIAN APPROXIMATED SOLUTION TO A PORTFOLIO MANAGEMENT PROBLEM
12. Structure and objectives of Austria's foreign direct investment in the four adjacent Central and Eastern European countries Hungary, the Czech Republic, Slovenia and Slovakia
13. The Effects of Reforming the Chinese Dual-Track Price System
14. An Investigation of transience upon mothers of primary-aged children and their school
15. Strategic monetary policy in a monetary union with non-atomistic wage setters
16. The name is absent
17. EFFICIENCY LOSS AND TRADABLE PERMITS
18. The Environmental Kuznets Curve Under a New framework: Role of Social Capital in Water Pollution
19. Novelty and Reinforcement Learning in the Value System of Developmental Robots
20. The name is absent