The Spillover Effects of Good Governance in a Tax Competition Framework with a Negative Environmental Externality

We investigate the impact of a political regime shift affecting consumers, business interests and lobby contributions when countries engage in tax competition in capital and a polluting resource. When consumers have more in fluence than resource owners, the resource tax rate and public spending rise while environmental damages, lobbying contribution, and the capital tax rate fall. This response can spillover to other countries leading to lower welfare. Capital tax harmonization improves welfare of consumers and resource owners. Resource tax harmonization and governance harmonization reducing the influence of lobbying both improve consumer welfare but resource owners are worse off.