Public investment, taxation, and long-run output in economies with multi-level governments

Philip Bodman, Harry Campbell, Thanh Le

    Research output: Contribution to journalArticlepeer-review

    7 Citations (Scopus)


    This paper examines the dynamic effects of taxation and investment on the steady state output level of an economy. A simple neoclassical growth model with different tiers of government is developed. The initial focus is on governments that aim to maximise their citizens' welfare and economic performance by providing consumption goods for private consumption and public capital for private production. It is shown that a long-run per capita output maximising tax rate can be derived and that there also exists an optimal degree of fiscal decentralisation. The analysis then extends to the case where governments attempt instead to maximise their own tax revenue to fund expenditures which do not contribute to the utility of their citizens. Three different cases of taxation arrangement are considered: tax competition, tax sharing, and tax coordination. The modeling shows that intensifying tax competition will lead to an increase in the aggregate tax rate as compared to the cases of sharing and coordination amongst governments. These tax rates are both higher than the long-run per capita output maximising rate that was implied under the welfare maximising government scenario.

    Original languageEnglish
    Pages (from-to)1603-1611
    Number of pages9
    JournalEconomic Modelling
    Issue number5
    Publication statusPublished - Sept 2012


    • Fiscal decentralisation
    • Output maximising tax rate
    • Tax competition
    • Tax coordination
    • Tax sharing
    • Welfare versus revenue maximising governments


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