Journal Article

Redistribution, Fiscal Competition, and the Politics of Economic Integration

Anke S. Kessler, Christoph Lülfesmann and Gordon M. Myers

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 69, issue 4, pages 899-923
Published in print October 2002 | ISSN: 0034-6527
Published online October 2002 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00230
Redistribution, Fiscal Competition, and the Politics of Economic Integration

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The paper examines the consequences of the economic integration of factor markets in a model with two countries that redistribute income among their residents. The social benefits in each country are financed by a source based tax on capital which is democratically chosen by its inhabitants. If either capital or labour is internationally mobile, the countries engage in fiscal competition and the partial integration of capital or labour markets is detrimental to the countries' redistributive ability. A move from partial to full integration, however, may alleviate rather than intensify fiscal competition, particularly, if the two countries face sufficiently similar economic and political conditions. In such a situation, for example, tax competition for mobile capital is softened as the labour market becomes more integrated and even vanishes if both factors are fully mobile. As a result, there is more redistribution in equilibrium and a majority of the population in each country is strictly better off.

Journal Article.  0 words. 

Subjects: Economics

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