Fiscal competition and public debt

authored by

Eckhard Janeba, Maximilian Todtenhaupt

Abstract

This paper explores the implications of high indebtedness for strategic tax setting when capital markets are integrated. When public borrowing is constrained due to sovereign default or by a binding fiscal rule, a rise in a country's initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that jurisdiction, while the opposite occurs elsewhere. On net a jurisdiction with higher initial debt becomes a less attractive location. Our analysis is inspired by fiscal responses in severely hit countries after the economic and financial crisis which are consistent with the theoretical predictions. We find a similar pattern on the sub-national level using administrative data from the universe of German municipalities.

External Organisation(s)

University of Mannheim
Munich Society for the Promotion of Economic Research - CESifo GmbH
Norwegian School of Economics (NHH)
Ludwig-Maximilians-Universität München (LMU)
Centre for European Economic Research (ZEW)

Type

Article

Journal

Journal of public economics

Volume

168

Pages

47-61

No. of pages

15

ISSN

0047-2727

Publication date

12.2018

Publication status

Published

Peer reviewed

Yes

ASJC Scopus subject areas

Finance, Economics and Econometrics

Sustainable Development Goals

SDG 9 - Industry, Innovation, and Infrastructure

Electronic version(s)

https://doi.org/10.1016/j.jpubeco.2018.10.001 (Access: Open)