Tax versus transfer competition*

Paper number: 98/08

Paper date: First version: April 1998 This version: September 1998

Year: 1998

Paper Category: Discussion Paper


Jean Hindriks
University of Exeter

Elias Tzavalis
University of Exeter


In a context where both the poor an the rich are (imperfectly) mobile, this paper compares the Nash equilibrium levels of income redistribution from the rich to the poor when jurisdictions compete either in taxes, in transfers or both in taxes and transfers. Although taxes and transfers are linked through the budget-balanced requirements, the analysis reveals intriguing differences. Indeed, it turns out that transfer competition results in much less redistribution than tax competition, while tax-transfer competition involves an intermediate level of redistribution. In each approach, the mobility of the rich is detrimental to redistribution and an increase in the dependency ratio reduces taxes. Concerning the effect of the mobility of the poor, these approaches reach opposite conclusions. That is, the mobility of the poor is beneficial to redistribution under tax competition but reduces redistribution under transfer competition.

JEL Classification Nos: H23; H70
Keywords: Tax competition; redistribution; mobility

Corresponding Author: Jean Hindriks, Department of Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263237, fax: (44) 1392 263242, email:


* I wish to thank Philippe De Donder, Dennis Epple and Gordon Myers for many stimulating comment. I also benefit from the comments of seminar participants at CORE and University of Essex. I am also grateful to the European Commission for financial support (contract no. ERBFMBICT971968) and to the University of Essex for its hospitality. Of course the usual disclaimer applies.