Artificial Time Inconsistency as a Remedy for the Race to the Bottom

23 Pages Posted: 18 Jan 2006

See all articles by Alfons J. Weichenrieder

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Oliver Busch

Goethe University Frankfurt - Faculty of Economics and Business Administration

Date Written: December 2005

Abstract

A long-standing concern in the literature has been that household mobility implies a serious threat to the viability of redistributive taxation. This paper considers the effects of deferred integration of migrants into the redistributive system of the target country. In a model of symmetric regions, deferred integration introduces a time consistency problem into governments' tax plans that reduces a region's incentive to undercut other regions' tax rates and can bring tax competition to a halt. On the one hand, rich migrants cease to benefit from the lower tax rate in the current period. On the other hand, the region's promise of a continuing low rate in the future is not credible. We also explore the case where poor recipients of social assistance are mobile while the rich are immobile.

Keywords: tax competition, federalism, mobility, social assistance, time consistency

JEL Classification: H25

Suggested Citation

Weichenrieder, Alfons J. and Busch, Oliver, Artificial Time Inconsistency as a Remedy for the Race to the Bottom (December 2005). CESifo Working Paper Series No. 1637, Available at SSRN: https://ssrn.com/abstract=876557 or http://dx.doi.org/10.2139/ssrn.876557

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Oliver Busch

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

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