The name is absent

THE EFFECTS OF TAX COMPETITION
WHEN POLITICIANS CREATE RENTS
TO BUY POLITICAL SUPPORT

Wolfgang Eggert and Peter Birch S0rensen

1. Tax competition and Leviathan

The globalisation of economic activity has sharpened the international debate on
the costs and benefits of tax competition. Critics argue that such competition will
lead to an underprovision of public goods as governments undercut each others’
tax rates in an attempt to attract mobile tax bases. The theoretical foundations
for this view were laid by Oates (1972), Zodrow and Mieszkowski (1986), Wilson
(1986), Wildasin (1989) and Janeba and Peters (1999), among others. In the
opposite camp it is argued that tax competition helps to reduce government waste
and to discipline rent-seeking politicians and bureaucrats. According to Public
Choice theorists such as Brennan and Buchanan (1977, 1980), government is an
ever-expanding Leviathan that needs to be tamed, and one way of ‘starving the
beast’ is to allow interjurisdictional competition for mobile tax bases.¹

This sceptical view of government which welcomes tax competition seems to
have gained ground in recent years. A popular version of the argument that tax
competition increases public sector efficiency assumes that self-serving politicians
and bureaucrats are somehow able to divert the taxpayer’s money away from uses
that benefit the general public and into uses that are pure waste from society’s
viewpoint. It is then argued that tax competition hampers this diversion of re-
sources away from beneficial public use, since growing mobility of tax bases raises
the marginal cost of public funds, thereby hardening voter resistance to govern-
ment waste. For example, the World Bank (2004, p. 53) vividly argues that
decentralization ‘permits a degree of institutional competition between centers of
authority that can . . . reduce the risk that governments will expropriate wealth’.

Edwards and Keen (1996) attempted to synthesize the conflicting views on
tax competition. In their analysis politicians maximise an objective function of

¹ This argument for tax competition is very different from those offered in the classical contri-
butions by Hayek (1939) and Tiebout (1956). Tiebout did not assume a Leviathan government,
but argued that fiscal competition would allow mobile households to locate in those jurisdictions
that offered their most preferred level and mix of public services.

<<   1   2   3   4   5   6   >>

More intriguing information