The political economy of tax coordination as a bargaining game between bureaucrats and politicians

In the public finance literature, the view prevails that tax competition am ong countries gives rise to an underprovision of public goods and that coor dinated tax increases are therefore desirable. Public choice arguments, in contrast, suggest that tax coordination may not be in the interest of the t axpayers/citizens because imperfections of the political process (political distortions) may lead to a waste of tax money. According to this view, tax competition is a desirable check on the power to tax whereas tax coordinat ion would only relax the budget constraint of an inefficient public sector. The present paper integrates the underprovision argument and the public ch oice view into a common theoretical framework. The government is assumed to consist of politicians and bureaucrats with diverging interests. Fiscal po licy is modelled as the outcome of a bargaining game between the bureaucrat s and the politicians. It turns out that coordinated tax increases always r aise the provision of public goods but also increase the cost of political distortions. The effect on the welfare of the representative citizen may be positive of negative, depending in particular on the distribution of barga ining power between bureaucrats and politicians.