Public investment, taxation, and long-run output in economies with multi-level governments

Bodman, Philip, Campbell, Harry and Le, Thanh (2012) Public investment, taxation, and long-run output in economies with multi-level governments. Economic Modelling, 29 5: 1603-1611. doi:10.1016/j.econmod.2012.05.002

Author Bodman, Philip
Campbell, Harry
Le, Thanh
Title Public investment, taxation, and long-run output in economies with multi-level governments
Journal name Economic Modelling   Check publisher's open access policy
ISSN 0264-9993
Publication date 2012-09-01
Sub-type Article (original research)
DOI 10.1016/j.econmod.2012.05.002
Volume 29
Issue 5
Start page 1603
End page 1611
Total pages 9
Place of publication Amsterdam, The Netherlands
Publisher Elsevier
Collection year 2013
Language eng
Formatted abstract
This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.
Keyword Fiscal decentralisation
Welfare versus revenue maximising governments
Tax coordination
Output maximising tax rate
Tax competition
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2013 Collection
School of Economics Publications
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Citation counts: TR Web of Science Citation Count  Cited 4 times in Thomson Reuters Web of Science Article | Citations
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Created: Wed, 06 Jun 2012, 21:08:16 EST by Dr Thanh Quang Le on behalf of School of Economics