question will be ‘yes’, as long as politicians have an incentive to rely to some extent
on taxation of a mobile factor, say, because it earns location-specific rents accruing
partly to foreign owners, as in Huizinga and Nielsen (1997) and S0rensen (2004).
In that case politicians will equate the marginal political costs of taxing the mobile
and the immobile factor, so tax competition that raises the marginal cost of taxing
the mobile factor will also raise the overall marginal cost of taxation and force
some reduction in public goods provision. Since optimising politicians equate the
marginal political benefits from rent creation and public goods provision, they
will then also want to curb rents. The simulation results reported by S0rensen
(2004) indicate that even in a setting with taxes on immobile as well as mobile
factors, tax competition can have significant quantitative effects on the marginal
cost of public funds. On this basis one would expect tax competition to have
non-negligible effects on rent-seeking in a political economy setting with multiple
tax instruments.
An interesting empirical exercise would be to investigate if there is any sys-
tematic link between proxies for the intensity of tax competition and relative
public/private sector wage rates for comparable skill groups, as suggested by the
present study. Finally, although we followed the Leviathan literature in assuming
a political bias in favour of ‘bureaucrats’, one can think of alternative settings
where the political proces generates rents to other groups, e.g., in the form of
selective (tax) subsidies or regulations in favour of certain well-organized private
sector interest groups. In such an environment one could still use the general
political economy approach suggested in this paper to study the effects of tax
competition on rent creation and resource allocation.
Acknowledgements: We wish to thank Vidar Christiansen, Andreas Knabe,
Guttorm Schjelderup, Christian Schultz, Ronnie Schob, David Wildasin, John
Douglas Wilson and two anonymous referees for valuable comments on an earlier
version of this paper. The usual disclaimer applies.
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