International tax competition: do public good spillovers matter?

Nelly Exbrayat (1) , Thierry Madies (2) , Stéphane Riou (3)

1 CERDI - Centre d'Études et de Recherches sur le Développement International
2 Departement d'Economie Politique - Departement d'Economie Politique
3 CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne

We study the impact of public good spillovers on tax competition between two imperfectly integrated countries with different levels of productivity. We show that international public good spillovers, by reducing the tax gap between countries, strengthen the agglomeration of firms in the most productive country. Then we carry on a welfare analysis. We first assume that governments are engaged in a redistributive tax policy. At the non-cooperative equilibrium, the tax level in the highproductivity country is inefficiently high while it is inefficiently low in the other country. A different conclusion emerges when tax revenues are recycled in a public good provision: taxes are inefficiently low in both countries and public good spillovers increase the global welfare. Finally, for a given amount of total tax revenues, public good provision in the high-productivity country is inefficiently high compared to its level in the low-productivity country.

Mots clés: cerdi

Domaines: Economies et finances

Nelly Exbrayat, Thierry Madies, Stéphane Riou. International tax competition: do public good spillovers matter?. International Tax and Public Finance, 2010, 17 (5), pp.479-500. ⟨halshs-00539235⟩