Diapositiva 1

1
Tiebout-Olson model
The inter-jurisdictional competition gives rise
to PERMANENT and INCREASING externalities
The inter-jurisdictional competition gives rise
to TEMPORARY externalities
competition is a self-learning procedure and for
that reason long lasting externalities are a sign
of too little competition rather than too much
Orthodox approach
Fiscal competition approach
The reasons why contrasts between the two visions
have not been solved is that it is impossible to
test empirically the two hypothesis
because

• international institutions are not homogeneous
• models are not able to capture differences

2
creation of nation-states with which some
European countries solved their conflicts in the
18th 19th centuries
superstate
E U
is not
federal solution adopted by the American
colonies, with which they put a stop to their
subjugation to England
Soviet federal solution whose peculiarity was the
absence of democracy rather than federalism.
federal union
or
it is a union among states that were nations
already and which are developing into an
ever-increasing supranational organization.
Should this union have a constitution or better a
fiscal constitution? While there is a
quasi-general consent on having a new
constitution, the idea of having a fiscal
constitution finds widespread resistance.
citizenship rights viewed as corresponding to an
equal level of public goods and services
single tax rate
3
Welfare economics philosophy Pigous view
Constitutional political economy
philosophy Wicksells principles
Fiscal constitution limiting the governments of
the member states as well as the government of
the Union would be detrimental or useless at the
most, since to limit governments action is
equivalent to precluding the achievement of
Pareto superior welfare positions
Only the result of the market implies efficiency
and the achievement of Pareto superior positions
The tax harmonization approach or orthodox
approach
The tax competition approach
fiscal competition
fiscal centralization
4
coherent only if
benevolent despot paradigm
FISCAL HARMONIZATION

• Assumptions
• well functioning electoral system
• perfect information

• the same procedure to calculate tax bases
• the same collection costs.

Government is a perfect maximizer of social
welfare
When he maximizes his utility ALSO the utility of
citizens is perfectly maximized
Context 15 governments with different tax rates
Which is the tax rate emerging through tax
harmonization, in a context with two countries, A
and B, which produce and exchange one good x ?
Differences in demands
5
Governments utility
where G (t) is the public expenditure covered
through taxation t is the tax rate decided by
each Government, t a , b T are the
transfers to compensate externalities involved in
the bargaining process. Their being positive or
negative depends on whether the Government is a
net receiver or a net payer
6
Country As government, accepts to rise its tax
rate since the resulting increase in yields is
associated with an increase in governments
expenditures without any transfer to country Bs
government. Country Bs government, in turn,
accepts to keep its tax rates unchanged since As
exports are lower, while Bs yields will
certainly not decrease
7
Considerations
marginal government NOT the median one determines
the tax rate
inframarginal governments are inclined to
maximize their revenues on condition that they
havent to transfer revenues to the marginal
government.
VAT harmonization forbids rates not lower
than.. instead of forbidding rates not higher
than..
Case
Rule for decisions
unanimity
8
Fiscal competition
homo economicus coincides with homo politicus
Assumptions bad functioning of electoral system
imperfect information
Government is an imperfect maximizer of social
welfare
When it maximizes its utility
citizens utilities are not
necessarily maximized
Context 15 governments with different tax rates
Which is the tax rate emerging through tax
competition, in a context with two countries, A
and B, which produce and exchange one good x ?
Differences in Governments rents
9
The most efficient government will have to supply
public goods at the lowest tax price
10
favourite

• public goods are the same
• political rents are the same

M A A S T R I C H T C H A L L E N G E
SOLUTION
OA
increasing tax rates pro tanto

• public goods can increase
• political rents
• are reduced

C A
3 deficit/GNP

• a shortage in public goods
• political rents are the same

not favourite
O A
reducing expenditures pro tanto

• public goods are the same
• political rents are reduced

C A
11
OA emphasizes the supply side
CA emphasizes the demand side
The tax price will emerge on a quasi-contractual
basis that puts together the two sides of the
fiscal account through a simultaneous single act
consisting of an expenditure proposal and the
related covering instrument
CRITIQUE
failure to consider the equity issue
Tax harmonization is the result of a unilateral
decision taken by governments that compute tax
rates on the citizens ability-to-pay principle.
One striking shortfall of this pattern is that it
is completely divorced from the expenditure side
since public expenditure is not perceived as a
countervalue.
CRITIQUE
in favour of the interests of both bureaucracy
and politicians