Institutional Competition
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Institutional Competition

Edited by Andreas Bergh and Rolf Höijer

Why is competition between institutions usually viewed in a negative light, when competition is considered positive in most other economic contexts? The contributors to this volume introduce new perspectives on this issue, analytically and empirically exploring reasons for this perception.
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Chapter 7: Fiscal Competition and the Optimization of Tax Revenues for Higher Growth

Victoria Curzon-Price


Victoria Curzon-Price Fiscal competition has been in the news ever since the OECD launched a campaign against ‘harmful tax competition’ in 1996. Nor is it likely to disappear any time soon. Instead, it is likely to intensify, as more and more governments resort to lower taxes to stimulate their economies. Is all tax competition harmful, or is it possible to distinguish between harmful and beneficial tax competition? Is it likely to result in a shifting of the tax burden from internationally mobile to immobile factors of production? And is even beneficial tax competition – supposing that it can be defined – not likely to end in a ‘race to the bottom’ – a race to cut taxes to such low levels that the very existence of the state as we know it might be threatened? The first part of this chapter will discuss the virtues of competition in general, and what fiscal competition in particular might yield, on both the positive and the negative side. We will suggest that the criterion of sector-specific misallocation of resources should be used to distinguish between harmful and beneficial tax competition. Section 7.2 will look at various tax regimes, which have sometimes been criticized by the OECD and EU, in the light of this criterion. Section 7.3 will discuss the pros and cons of fiscal competition in general, while Section 7.4 will judge the actual extent of fiscal competition today (2006) and its apparent impact on tax revenues and economic growth. Although...

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