On Tax Competition: The (Un-)Expected Advantages of Decentralized Fiscal Autonomy

Tax competition is much discussed in the political arena these days. Although it is not a new phenomenon, the political pressure has increased to restrict tax competition by intensifying tax coordination and accomplishing tax harmonization. This particularly holds for the EU which has established a Code of Conduct for business taxation in 1997 and is about to establish a system of information exchange with respect to capital income taxation (allowing Austria, Belgium and Luxembourg a minimum source tax on capital income as an alternative). In 2001, the Commission has additionally released the so called ‚Ruding II‘-report in which a uniform corporate tax base with formulary apportionment is proposed for the EU. In addition, the OECD (1998) aims at stronger tax coordination among its members also favoring a system of information exchange. Such a system would necessarily involve the abolishment of (or the reduction of the strictness of) bank secrecy laws around the world (Feld 2002).

The European Constitution Project from the Perspective of Constitutional Political Economy

Three topics of a European constitution are discussed. First, basic arguments from constitutional political economy that aim at restricting representatives’ potential misuse of powers in a European Union with extended competencies are summarized. Since a European demos does not yet exist, an extension of competencies of the European Parliament is not sufficient in order to legitimate political decisions at the EU level. The introduction of elements of direct democracy in the European constitution would shape the creation of such a demos and lead to a stronger control of the European legislature and executive. Second, the introduction of direct democracy in the European constitution is proposed in order to reduce the European democratic deficit. Third, the creation of a European federation requires a more transparent assignment of competencies and rules to resolve conflicts between different centers of power. A European federation should be organized according to the principles of competitive federalism.European Constitutional Convention, Bill of Rights, Separation of Powers, Competitive Federalism, Referendums, European demos.

Economic Growth and Judicial Independence: Cross Country Evidence Using a New Set of Indicators

Rational politicians are interested in judicial independence (JI) in order to make their promises credible. But if politicians’ preferences deviate from the dicta of the judiciary, they also have incentives to renege on judicial independence. These two conflicting aspects are measured by two indicators: (i) de iure JI focusing on its legal foundations and (ii) a de facto JI focusing on countries’ actually experience. Whether JI affects economic growth is tested for a cross section of 57 countries. While de iure JI does not have an impact on real GDP growth per capita growth, de facto JI positively influences it.economic growth, rule of law, judicial independence

Making Judges Independent – Some Proposals Regarding the Judiciary

It is argued that an independent judiciary is a necessary condition for both individual liberty and economic prosperity. After having surveyed the literature dealing with how to arrange for an independent judiciary, the authors derive some additional policy implications by drawing on two indicators of judicial independence (JI) recently introduced by them. De facto JI has a robust and highly significant impact on economic growth. Individual components of both de jure and de facto JI on economic growth are estimated for their impact on economic growth. Additionally, the effects of other institutional arrangements such as presidential vs. parliamentary systems are inquired into.judicial independence, constitutional design, positive constitutional economics, economic growth

The Role of Direct Democracy in the European Union

In this paper, the introduction of direct-democratic decision-making in all EU decisions is considered when it is feasible without prohibitively increasing decision-making costs. We start with the contractarian argument that each constitution is a contract joining the citizens of a state and requires as such the explicit agreement of (a majority of) citizens. Thus, the future European Constitution as well as future changes of it should be decided by the European citizens. After a discussion of the pros and cons of direct democracy, the ability of direct democracy to help creating a European demos is discussed. Consequently, we propose a mandatory (required and binding) referendum on total and partial revisions of the European Constitution. In addition, we propose a constitutional initiative, a statutory and a general initiative as well as a fiscal referendum for financially important projects.democracy, referenda, initiatives

Fiscal Decentralization and Economic Growth in OECD Countries: Is there a Relationship?

We study the relationship between fiscal decentralization and economic growth for 23 OECD countries from 1975 to 2001 by using new panel data on sub-federal tax autonomy. While initial estimations suggest that fiscal decentralization causes lower growth rates, we find that this result is not robust to alternative specifications. We also fail to obtain evidence for a negative relationship in a number of additional robustness checks. We thus conclude that fiscal decentralization is unrelated to economic growth.fiscal federalism, sub-national fiscal autonomy, tax competition

Sustainable Fiscal Policy in a Federal System: Switzerland as an Example

How a sustainable fiscal policy can be performed in a federal system is not only a Swiss problem but is also discussed in other federal countries like Germany and Austria, and in the European Union. Contrary to most other countries, the Swiss fiscal system is characterised by an extensive fiscal federalism with high fiscal autonomy at all governmental levels, by direct popular rights which include fiscal referenda at the cantonal and local levels, and by particular constitutional and/or statutory fiscal restraints in order to prevent excessive public debt. In this paper, the effects of these constitutional clauses on public finances are investigated. Using a panel of the 26 Swiss cantons from 1980 to 1998, we provide evidence that direct democracy leads to significantly lower expenditure and revenue. The fiscal constraint, on the other hand, significantly reduces budget deficits. Total, cantonal as well as local expenditure and revenue are the lower the higher the share of local expenditureDirect Democracy, Referenda, Initiatives.

Strategic Tax Collection and Fiscal Decentralisation: The Case of Russia

In a centralized federation, where tax rates and taxation rules are set by the federal government, manipulating the thoroughness of tax auditing and the effectiveness of tax collection could be attractive for regional authorities because of a variety of reasons. These range from tax competition to principal-agent problems, state capture and benefits of fiscal equalisation. In this paper we discuss strategic tax auditing and collection from the perspective of fiscal federalism and test for strategic tax collection empirically using data of the Russian Federation. Russia’s regional authorities in the 1990s have always been suspect of tax auditing manipulations in their favour. However, in the 2000s increasing bargaining power of the centre seems to induce tax collection bodies in the regions to manipulate tax auditing in favour of the federation. We find partial evidence in favour of both of these hypotheses.fiscal federalism, tax arrears, transition economies

Strategic Tax Competition in Switzerland: Evidence from a Panel of the Swiss Cantons

Tax competition is discussed as a source of inefficiency in international taxation and in fiscal federalism. Two preconditions for the existence of such effects of tax competition are that mobile factors locate or reside in jurisdictions with – ceteris paribus – lower tax rates and that taxes are actually set strategically in order to attract mobile production factors. It is well known from studies about Swiss cantonal and local income tax competition that Swiss taxpayers reside where income taxes are low. In this paper, empirical results on strategic tax setting by cantonal governments are presented for a panel of the Swiss cantons from 1984 to 1999. Completing the evidence on Swiss tax competition, the income tax rates in cantons are lower, the lower the tax rates of their neighbors.tax competition, strategic tax setting, personal income taxes

The Impact of Corporate and Personal Income Taxes on the Location of Firms and on Employment: Some Panel Evidence for the Swiss Cantons

The impact of corporate income taxes on location decisions of firms is widely debated in the tax competition literature. Tax rate differences across jurisdictions may lead to distortions of firms’ investment decisions. Empirical evidence on tax induced relocation and subsequent economic development in the U.S. and Europe is still inconclusive. Much the same applies to Switzerland. While there is some evidence on personal income tax competition between Swiss cantons, evidence on the impact of intercantonal corporate income tax differences on the location of business within Switzerland is missing. In this paper, we present econometric evidence on the influence of corporate and personal income taxes on the regional distribution of firms in 1981 and 1991 and on cantonal employment using a panel data set of the 26 Swiss cantons from 1985 to 1997. The results show that corporate and personal income taxes deter firms to locate in a canton and subsequently reduce cantonal employment.Corporate income taxes, personal income taxes, tax competition, business location