Dynamic Tax Competition and Public-Sector Modernisation

This paper addresses the question whether increased mobility of capital enhances public-sector modernisation. Public-sector modernisation is modelled as the accumulation of knowledge (or another accumulated production factor) that serves as an input in the government's production of a consumption good. The public-sector provides a direct transfer to households. The tax competition model in the background is a dynamic model in which capital flight induced by taxation is a process that takes time. The speed with which firms can relocate capital to other jurisdictions is taken as a measure of the degree of capital mobility. The main result of the paper is a contradiction of the idea that the competitive pressure caused by increased capital mobility enhances public sector modernisation