Abstract:

This paper investigates the trade-off between growth and redistribution in open economies. In closed economies redistribution seems to reduce growth. I show that in open economies tax competition leads redistributing ('left-wing') governments to mimic 'right-wing' policies if capital mobility is very high. In the model 'right-wing' governments are strategically passive and just maximize GNP growth. For domestic left-wing governments it is shown that 'left-right' competition leads to more redistribution and lower GDP growth than 'left-left' competition. Efficiency differences allow for higher GDP growth {\em and} redistribution than one's opponent.
Irrespective of efficiency differences 'left-wing' governments are shown to have higher GDP growth rates when competing with other 'left-wing' governments.
 

Keywords: Growth, Distribution, Tax Competition, Capital Mobility

JEL Classification: O41, H21, D33, C72, F21
 
 

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