Fiscal centralization versus decentralization: Growth and welfare effects of spillovers, Leviathan taxation, and capital mobility |
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Authors: | Angus C Chu CC Yang |
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Institution: | a Durham Business School, Durham University, Durham, United Kingdom b School of Economics, Shanghai University of Finance and Economics, Shanghai, China c Institute of Economics, Academia Sinica, Taipei, Taiwan d Department of Public Finance, National Chengchi University, Taipei, Taiwan e Department of Public Finance, Feng Chia University, Taichung, Taiwan |
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Abstract: | This paper develops an endogenous growth model with spillovers of public goods, Leviathan taxation, and mobile capital to examine the relative merits of centralized and decentralized fiscal systems for economic growth and social welfare. We show that a decentralized system dominates a centralized system in terms of economic growth; however, the difference in social welfare between a decentralized and a centralized system is non-monotonic and displays a hump-shaped relationship with respect to capital mobility. Since higher capital mobility induces stronger tax competition, this finding implies that there is an optimal degree of tax competition; some tax competition is desirable, but fierce tax competition may be harmful. We also show that there is a critical level of spillovers of public goods above which centralization dominates decentralization in terms of social welfare, as in previous studies; however, if spillovers are below this critical level, capital mobility also matters in the welfare comparison between centralized and decentralized systems. |
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Keywords: | D72 H20 O41 O43 |
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