Abstract:

This paper considers the trade-off between growth and redistribution policies in a two-country world with endogenous growth, tax competition, perfect capital mobility and extreme investment behaviour, two classes in each country and governments having opposing political preferences. It is shown that higher or lower growth when governments redistribute depends on their opponents when setting taxes.We find that the growth redistribution trade-off problem hinges on technological efficiency. If countries are equally efficient, no redistribution takes place, not even by two left-wing governments, for fear of capital flight. We
show that redistribution is possible with a high growth rate as long as an efficiency gap can be maintained. This leads to capital flight for the inefficient country.
 

Keywords: Growth, Tax Competition, Redistribution, Capital Flight

JEL Classification: O4, H2, D3, C7, F2
 

E-mail: rehme@hrzpub.tu-darmstadt.de