The Spillover Effects of Good Governance in a Tax Competition Framework with a Negative Environmental Externality
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We investigate the impact of a political regime shift affecting consumers, business interests and lobby contributions when countries engage in tax competition in capital and a polluting resource. When consumers have more influence than resource owners, the resource tax rate and public spending rise while environmental damages, lobbying contribution, and the capital tax rate fall. This response can spillover to other countries leading to lower welfare. Capital tax harmonization improves welfare of consumers and resource owners. Resource tax harmonization and governance harmonization both reduce the influence of lobbying and improve consumer welfare but resource owners are worse off.
KeywordsLobbying Environmental damage Tax competition Spillovers
JEL ClassificationH23 D73
We are grateful to Hayley Chouinard who provided comments on an earlier version of this manuscript and two reviewers who helped clarify some implications from our model.
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