تمرکز زدایی و رقابت مالیاتی بین المللی

This paper models tax competition between two countries that are divided into regions. In the first stage of the game, the strategy variable for each country is the division of a continuum of public goods between central and regional government provision. In the second stage, the central and regional governments choose their tax rates on capital. A country's decentralization level serves as a strategic tool through its influence on the mix of horizontal and vertical externalities that exists under tax competition. In contrast to standard tax competition models, decentralizing the provision of public goods may improve welfare.

The roles of central and lower-level governments in a federal system are imperfectly understood. Much of the local public economics literature treats these roles as exogenous. The different levels of government are each given control of various tax and expenditure instruments, and the central government can employ various policies to influence the behavior of lower-level governments. The theory developed by Tiebout (1956) justifies a large role for local governments by emphasizing the ability of mobile households to “vote with their feet.” By doing so, these households effectively reveal their preferences for local public goods, and local governments use this information to efficiently provide these goods. In contrast, the central government encounters difficulties in inducing individuals to reveal their preferences for public goods. But only recently have researchers focused on formal models of informational asymmetries in a federal system.2 A weakness of this literature is that these asymmetries are assumed rather than derived. It is now well-understood that the behavior of independent governments is unlikely to be optimal in any reasonable sense, and a central government is needed to correct the various externalities and income distribution problems that arise in a system of independent governments. There exists a particularly large literature on tax competition, under which, governments compete for scarce capital, leading to inefficiently low levels of taxation and public good provision.3 In contrast to Tiebout models, this literature emphasizes problems with the decentralized provision of public goods by independent governments. However, it seems to stack the deck in favor of centralized provision because it typically assumes away any inefficiencies at the central level.4

In traditional models of fiscal federalism, an important role for the central government is to correct the externalities created by the independent behavior of communities or regions. There is a large literature on the use of intergovernmental grants for this purpose, and various restrictions on the behavior of lower-level governments may also be used. However, central governments are not immune to political pressures that limit the usefulness of such instruments. Thus, it seems useful to explore ways of designing the structure of a federal system to reduce the harmful effects of externalities without the need for an active central government role. In this paper, we have examined the division of public good provision between different levels of government as one aspect of this design. This division works not so much by reducing the size of horizontal and vertical externalities but rather by offsetting one against another until their net effect is optimal (but nonzero, given their use as a strategic device in this model). The analysis therefore departs quite dramatically from the first-best analysis of externalities, which says that they should be targeted directly with the appropriate subsidies or taxes. Instead, it points to the value of analyzing different externalities together rather than in isolation, and designing a federal system that optimally controls their net impact. For the particular externalities under consideration, horizontal and vertical, we hope to have demonstrated the usefulness of departing from the common practice of treating their relative importance as exogenous. As an alternative method for correcting these externalities, the central government could use intergovernmental grants to influence the policy choices of regional governments. For an economy characterized by tax competition, the use of these grants has been studied by Wildasin (1989), DePater and Myers (1994), and Bucovetsky et al. (1998). In these papers and the current context, this approach requires the central government to commit to a grant system in the initial period, prior to the determination of regional taxes. If it is relatively difficult to alter the assignment of public expenditure responsibilities to different levels of government, then this assignment might serve as a better commitment device.12