The Role of Symmetry between the Revenue and the Expenditure Side of the Government Budget in the Debate about the Potential Negative Effects of Tax Competition

Abstract

The effects of capital tax competition are reconsidered in this paper incorporating the argument that the expenditure structure of public budget should reflect its revenue structure. The paper offers a small open economy model where capital and labour tax revenues are used exclusively on the provision of public inputs. It is shown that if the revenue side of the government budget exactly matches the expenditure side that is if industrial public goods are financed by both private production factors with the weights reflecting the contributions of public inputs to the private factor productivity then public inputs are provided optimally even in the presence of tax competition.