Tax Competition and Political Agency Problems

Reputation concerns of politicians sometimes force them to implement biased policies. We study the effect of reputation (i.e., reelection) concerns on taxation in the age of globalization. To this end, we construct a two-country asymmetric tax competition model in which the residents in one of the two countries do not know their policymaker's type. When politicians' reputation concerns are high, a politician who implements extremely low taxation acquires a good reputation and thus the benevolent type politician argues for extremely low taxation, which can be regarded as anti-taxation populism. We show that globalization alters the properties of this seemingly downside effect of reputation concerns. First, under tax competition, the country's poor economic condition relative to the other country facilitates the emergence of populism. Second, under tax competition, populism can improve welfare in terms of either the populist country or the whole world, whereas that is not the case in a closed economy