David E. Wildasin

Nash equilibria in models of fiscal competition

Abstract This paper analyzes Nash equilibria in a simple model of an economy with jurisdictions engaging in fiscal competition. Small-number Nash equilibria in which tax rates are the strategic variables are shown not to coincide with Nash equilibria in which public expenditure levels are the strategic variables.

Interjurisdictional Capital Mobility: Fiscal Externality and a Corrective Subsidy

Abstract Recent studies emphasize that local property taxation may result in inefficiently small amounts of local public spending. This paper shows that the inefficiency can be traced to a fiscal externality: when one jurisdiction increases its taxes, it causes a flow of capital to other jurisdictions that increases their tax revenues. The inefficiency can be corrected with a subsidy that internalizes the externality. Key empirical parameters determining the magnitude of the externality are identified. Illustrative calculations indicate that subsidy rates on the order of 40% might be required to achieve efficiency.

Capital tax competition: bane or boon

This paper reviews potential advantages and disadvantages of capital tax competition. Tax competition may introduce, mitigate, or exacerbate inefficiencies in both the private sector and the public sector. In different models, tax competition may either limit or increase public expenditures and taxes on mobile factors, with differing welfare consequences. We also discuss the implications of tax competition for redistributive policies and for policies dealing with risk, and we identify some of the possible empirical implications of tax competition. D 2003 Elsevier B.V. All rights reserved.

Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations

Subnational governments are assuming greater fiscal responsibility in many developing and transition countries. There is concern, however, that fiscal decentralization may weaken fiscal discipline -that local authorities may undertake commitments or incur debt obligations that subsequently result in massive central government support, in the form of extraordinary transfers, or bailouts. (Recent experience in major U.S. cities shows that these problems are not restricted to developing countries.) Such bailouts could in turn cause national fiscal imbalances, excessive borrowing, and macroeconomic instability. Some analysts recommend that central authorities maintain strict control over the fiscal behavior of lower-level governments, but others argue that such controls could undercut the goals of fiscal decentralization, including autonomy. The author shows that central authorities may have strong incentives to prop up the finances of local governments when the public services provided locally benefit the rest of society. The prospect of such interventions may in turn create incentives for localities to underprovide services that produce substantial spillover benefits, using local resources instead for purposes that may benefit local constituencies but not nonresidents. When central fiscal interventions are big enough, and when a loss of local control over the use of fiscal resources is not too costly to local residents, local decisionmakers will act to induce central government bailouts, resulting in inefficient outcomes for the system as a whole. This is not to say that fiscal decentralization produces perverse incentives or requires central government control over local fiscal policies. But incentives for bailouts can be especially strong when local governments are considered too big to fail -for example, New York, Philadelphia, and Washington, DC (in the United States) and Sao Paulo and Rio de Janeiro (in Brazil). In such cases, the repercussions from major breakdowns in the provision of services -or in debt servicing- can be too costly for central governments to ignore. Problems of fiscal discipline may result not because there is too much fiscal decentralization, says the author, but because there is too little. It may make sense to carry out more thorough decentralization -for example, devolving fiscal authorities to smaller jurisdictions or special-purpose functional units, or subdividing large subnational jurisdictions into many smaller units.

Fiscal Competition in Space and Time

This paper analyzes fiscal competition among numerous spatially- separated jurisdictions in an explicitly dynamic framework. The degree of factor mobility between jurisdictions is imperfect because it is costly and time-consuming to adjust factor stocks. Even if it is harmful in the long run, a jurisdictions residents can benefit in the short run from taxing mobile factors owned by non-residents. The optimal tax on mobile factors is lower, the faster the speed with which factors adjust to fiscal policy. Anticipated taxes are less beneficial than those that can be imposed unexpectedly.

A Median Voter Model of Social Security

This paper presents a theoretical median voter analysis of the determination of the level of social security. The framework for the analysis is a continuous-time, overlapping-generations model with nonaltruistic households facing borrowing constraints in the capital market. A majority voting equilibrium is shown to exist in which the median voter is liquidity-constrained. The desired level of social security for each voter is a declining function of the preexisting level of social security. As a consequence, in a sequence of votes on social security beginning with a zero level, the program initially overshoots its steady state value. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Some rudimetary ‘duopolity’ theory

Abstract Let there be a pair of jurisdictions whose choices of tax, expenditure, or regulatory policies affect each other. Their strategic interactions can be modelled in various ways. Candidate models of duopolitical equilibrium include Nash equilibria in taxes, expenditures, or regulatory standards. Examples of several of these equilibria are presented and compared. Choosing among them is a game-theoretic problem involving the determination of strategic variables subject to side constraints. The problem can be formulated as a two-stage game, in which governments commit to using certain strategic variables in the first stage, and then determine the values of these variables themselves in the second stage.

Factor Mobility and Fiscal Policy in the EU: Policy Issues and Analytical Approaches

Increased integration of labour and capital markets creates significant challenges for the welfare states of modern Europe. Taxation of capital and labour that finances extensive programs of cash and in-kind redistribution creates incentives for capital owners and workers to locate in regions where they obtain favorable fiscal treatment. Competition among countries for mobile resources constrains their ability to alter the distribution of income and may lead to reductions in the size and scope of redistributive policies. Mobility of labour and capital is imperfect, however. Recent trends indicate that labour and capital are neither perfectly mobile nor perfectly immobile, but rather adjust gradually to market conditions and economic policies. This paper presents an explicitly dynamic analysis showing that governments can achieve some redistribution when it is costly for factors of production to relocate. As the costs of factor mobility fall, however, the effectiveness of redistributive policies is more limited, and governments have weaker incentives to pursue them. Liberalised immigration policies, EU enlargement, and other steps that promote integration of the factors markets of Western Europe with those of surrounding regions thus present a challenge to policymakers if they also wish to maintain fiscal systems with extensive redistribution.

Pareto-Efficient International Taxation

This paper analyzes Pareto-efficient international tax regimes. Because every country faces its own national budget constraint, the Diamond-Mirrlees production-efficiency theorem, which underlies key tenets of policy advice in international taxation - the desirability of destination basis for commodity taxation, of the residence principle for capital income taxation, and of free trade - does not apply. The paper establishes conditions - relating to the availability of explicit or implicit devices for reallocating tax revenues across countries - under which production efficiency is nevertheless desirable, and characterizes the precise ways in which Pareto-efficient international taxation may require violation of established tenets.

Decentralized income redistribution and immigration

Abstract We analyze the welfare and other effects of immigration on a system of jurisdictions with a common labor market, mobile capital, and redistributive tax/transfer policies. Comparative-statics analysis of a model of Nash non-cooperative equilibria in tax/transfer policies shows that the welfare effect of immigration depends on whether immigrants are net fiscal contributors or burdens. Any one jurisdictions redistribution and immigration policies generate fiscal externalities for others in the system, which a central government can internalize by appropriate taxes and subsidies.