Koethenbuerger, Marko and Lockwood, Ben (2007) Does tax competition really promote growth? Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

Preview

PDF WRAP_Lockwood_twerp_810.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (284Kb)

Abstract

This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity,and capital taxes fund a public good which may be for final consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies “extreme” tax competition. Stochastic shocks imply that households face a portfolio choice problem, which may dampen down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth, consistent with the empirical evidence.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Taxation -- Econometric models, Intergovernmental fiscal relations, Fiscal policy, Economic development -- Mathematical models
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	2007
Number:	No.810
Number of Pages:	24
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Akai, N. and M. Sakata (2002), “Fiscal Decentralization Contributes to Economic Growth: Evidenc from State-Level Cross Section Data from the US”, Journal of Urban Economics 52, 93-108. Alesina, A., and D. Rodrik (1994), “Distributive Politics and Economic Growth”, Quarterly Journal of Economics 109, 465-490. Barro, R.J. (1990),“Government Spending in a Simple Model of Endogenous Growth”, Journal of Political Economy 98, S103-S125. Brueckner, J. (2006), “Fiscal Federalism and Economic Growth”, Journal of Public Economics 90, 2107-2120. Davoodi, H. and H. Zou (1998), “Fiscal Decentralization and Economic Growth: A Cross-Country Study”, Journal of Urban Economics 43, 244-257. Hatfield, J. (2006), “Federalism, Taxation, and Economic Growth”, unpublished paper, Graduate School of Business, Stanford University. Iimi, A. (2005), “Fiscal Decentralization and Economic Growth Revisited: An Empirical Note”, Journal of Urban Economics 57, 449-461. Jones, L.E. and R.E. Manuelli (2005), “Neoclassical Models of Endogenous Growth: The Effects of Fiscal Policy, Innovation and Fluctuations”. In: P. Aghion and S.N. Durlauf, Editor(s), Handbook of Economic Growth, Volume 1, Part 1, 13-65, Elsevier. Kenc, T. (2004), “Taxation, risk-taking and growth: a continuous-time stochastic general equilibrium analysis with labor-leisure choice”, Journal of Economic Dynamics and Control 28, 1511-1539. Lee, K., (2004), “Taxation of Mobile Factors as Insurance Under Uncertainty”, Scandinavian Journal of Economics 106, 253-271. Lejour, A. and H. Verbon (1997), “Tax Competition and Redistribution in a Two-Country Endogenous Growth Model”, International Tax and Public Finance 4, 485-497. Philippopoulos, A. (2003), “Are Nash Tax Rates too Low or Too High? The Role of Endogenous Growth in Models with Public Goods”, Review of Economic Dynamics 6, 37-53. Philippopoulos, A. and H. Park (2003), “On the dynamics of growth and fiscal policy with redistributive transfers”, Journal of Public Economics, 515-538. Ramey, G. and V. Ramey (1995), “Cross-Country Evidence on the Link Between Volatility and Growth”, American Economic Review 85, 1138-1151. Stansel, D. (2005), “Local Decentralization and Economic Growth: A Cross-Sectional Examination of US Metropolitan Areas” , Journal of Urban Economics 57, 55-72. Thornton, J. (2007), “Fiscal Decentralization and Economic Growth Reconsidered”, Journal of Urban Economics 61, 64-70. Turnovsky, S. (2000), “Government Policy in a Stochastic Growth Model with Elastic Labour Supply”, Journal of Public Economic Theory 2, 389-433. Wooler and Phillips (1998), “Fiscal Decentralization and LDC Economic Growth: An Empirical Investigation”, Journal of Development Studies 34, 139—148. Zhang, T. and H. Zou (1998), “Fiscal Decentralization, Public Spending, and Economic Growth in China”, Journal of Public Economics 67, 221-240. Zodrow, G.R. and P. Mieszkowski (1986), “Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods”, Journal of Urban Economics 19, 356 - 370.
URI:	http://wrap.warwick.ac.uk/id/eprint/1404

Request changes to a record

Actions (login required)

View Item