Keywords: Fiscal Federalism, Tax Competition,
Economic Integration, Migration, Income Redistribution
JEL--Classification:
D78, H23, H77
The paper
examines the redistributive consequences of the economic integration of factor
markets. We consider 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, i.e., 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, increased integration of labour markets will
soften the incentives compete for mobile capital.
As a
result, there is more redistribution in equilibrium and a majority of the
population in each country is strictly better off.
Copyright © 1998 Anke
Kessler