Theories of Tax Competition

A central message of the tax competition literature is that independent governments engage in wasteful competition for scarce capital through reductions in tax rates and public expenditure levels. This paper discusses many of the contributions to this literature, ranging from early demonstrations of wasteful tax competition to more recent contributions that identify efficiencyenhancing roles for competition among governments. Such roles involve considerations not present in earlier models, including imperfectly-competitive market structures, government commitment problems, and political economy considerations.