Debt in a model of tax competition

Abstract

This paper develops a two-jurisdiction, two-period model of tax competition where jurisdictions can finance government spending not only with current tax revenues but also with debt. Jurisdictions will have an incentive to issue debt because it reduces the standard tax competition problem of underprovision of government goods. Because the underprovision problem becomes more severe in the period when debt is retired, the net effects on deadweight loss from tax competition cannot be signed.