Competition among Nation States
Final Report Abstract
The increasing economic integration and mobility of production factors have raised new challenging issues for the design and implementation of public policies. By developing new approaches for the analysis of tax competition and the institutional design of governance, both from a positive and normative perspective, this research project tackles several burning issues for France and Germany. We first address the question how to counter the harmful effects of tax competition by focusing on two mechanisms that might attenuate the race-to-the-bottom in taxes: home attachment and minimum tax rates. Konrad (2009) shows that contrary to one could expect, agreements on minimum taxes might reinforce the race-to-the-bottom in taxes. Thus, the failure of the EU to implement a minimum tax rate for capital income at source and corporate income taxation would not have aggravated the race-to-the-bottom in taxes. Regarding tax competition with respect to mobile workers, theoretical and empirical contributions point out that home attachment might reduce tax competition, so that governments might strategically invest in those kind of public expenditures that instill home attachment in order to attract the high-skilled workers. The second part of the project focuses on the determinants of firms' location choice and the way they affect public policies. In an empirical analysis using French data, Combes et al. (2009) show that agglomeration economies contribute the most to the higher productivity of firms and workers that we observe in largest cities, while selection effect caused by tougher competition in these areas exists but appears to be a second-order determinant. Those structural determinants of firms' location choice are not without consequences for competition between national governments. In different contributions, Exbrayat et al. (2009) show that whatever the source of countries' attractiveness with respect to firms (productivity level, flexible labour market), it makes firms less sensitive to public policies, and governments internalize this effect by competing less fiercely over taxes or subsidies. This result is then tested empirically on OECD countries. Using an index of bilateral trade integration à la Head and Mayer (2004), results indicate that interactions in the setting of effective average tax rates are significant only between countries that are important trade partners while there is little evidence for the existence of a taxable agglomeration rent. Overall, those results suggest that tax competition is not so fierce once we control for the main determinants of firms location choice. The last part of the project focuses on the design of fiscal rules and intergovernmental responsibilities in a competitive environment. Breuillé and Vigneault (2010) show that decentralized leadership in combination with overlapping equalization schemes can serve to worsen the soft budget constraint problem in multi-tier federal systems. The issue of the optimal tax equalization scheme is also addressed in a context of decentralized leadership by Breuillé et al. (2010), who demonstrate that a net equalization scheme favors fiscal discipline in comparison to a gross equalization scheme by limifing the competition among regions to attract ex-post transfers. Finally, Gravel et al. (2009) discuss the segregative properties of jurisdictions' formation induced by citizens' mobility. If the central government pursues a Leximin objective, it is shown that the only stable jurisdiction structures that can emerge are those in which the jurisdictions' poorest households have all the same wealth, while a richer class of stable jurisdiction structures are compatible with a central utilitarian government.
Publications
- (2008). "Mobile tax base as a global common". International Tax and Public Finance, 15(4), pp. 395-414
Konrad K.A.
- (2009). "Non-binding minimum taxes may foster tax competition". Economic Letters 102, pp. 109-111
Konrad K.A.
- (2009). "Trade integration and the destination of subsidies". Louvain Economic Review, 75(4), 407-423
Exbrayat N., Gaigné C. et S. Riou
- (2010) "International tax competition: do public good spillovers matter?" International Tax and Public Finance, 17(5), 479-500
Exbrayat N., Madiés T. et S. Riou
- (2010). "Gross Versus Net Equalization Scheme in a Federation with Decentralized Leadership". Journal of Urban Economics, vol. 68 (2), 205-214
Breuillé M.-L., Madies T. and Taugourdeau E.
- (2010). "Overlapping soft budget constraints". Journal of Urban Economics, vol. 67 (3), 259-269
Breuillé, M.-L.; Vigneault, M.
