Tag Archives: Tiebout competition

International Tiebout competition

A major reason for skepticism about open borders among many who are partially sympathetic is the fear that poor immigrants will vote for redistribution. Natives might benefit, on average, from their interaction with immigration in the market, but in the political arena, poor immigrants with little to lose will vote for higher taxes and government handouts, making natives worse off. To deny immigrants the vote would solve this problem in theory, but raises other philosophical issues about the meaning of consent of the governed, and in any case might not be politically sustainable. Opportunistic parties might hand out citizenship to immigrants who they hope will be their future constituency. Immigrants might also take advantage of their physical presence to agitate in the streets for the vote and/or directly for the government benefits they hope to win by it. In short, open borders will make government more redistributive.

But the logic of Tiebout competition points the other way. Tiebout (1956) famously argues that local governments will provide public goods efficiently if people are free to move among jurisdictions, and concludes that we can expect public goods to be provided more efficiently at the local level than at the national level. Caplan recently explained where Tiebout goes wrong: (1) local governments are not perfectly competitive but face downward-sloping demand curves for residence and so can extract monopoly rents; (2) emigrants can’t take their real estate with them so bad local governments will reduce property values; and (3) local governments aren’t for-profit corporations and don’t face the incentives that for-profit corporations do to give customers/residents what they want. All good points, but there’s still something to be said for “voting with the feet.” Local governments may not be profit-maximizing firms, but they still differ in their performance, and people do get some choice over what local public goods they want by deciding where to live. In the short run, local misgovernment may depress property values more than inducing migration, but in the long run, capital can be adjusted, and misgoverned places can revert to weeds while well-governed places teem with new high-rises. And local governments are still somewhat competitive.

In the Tiebout model, government provides public goods rather than engaging in redistribution. The people who choose to live in a location don’t mind paying for what the government does, because they regard the benefits as greater than costs. If not, they would move. The government might charge the rich more than the poor, if it’s still providing the rich value for money, and especially if the rich value local public goods more, in money terms, than the poor do, which is plausible, since they presumably get less marginal utility from a dollar but might not get less marginal utility from a statue in the park or clean air or good streetlights. But if the government charges the rich too high a price for local public goods, they’ll move to a jurisdiction with lower taxes, and explicit redistribution is ruled out by the exit option.

Garett Jones has pointed out that a comparison of state tax regimes with federal tax regimes seems to support (loosely) the Tiebout model. See “Can Progressivity Survive Exit?”:

I should note though, that while state taxation is regressive in percentages, it’s progressive in dollars.  And that’s the point of my tweet: Higher earners pay more than lower earners even though they could leave.  Perhaps some of that is altruism, but I suspect-without-proof that most of it is just that the rich (and middle class) buy more and better government services than the poor.
It’s possible that progressive income taxation could coexist with voluntary competitive government. Maybe the high-skilled need to be near each other to produce a lot, so the locales preferred by the rich can tax that demand for proximity.  The (not very progressive) New York City income tax comes to mind.But at the national level, I suspect that the reason the rich pay higher total tax rates is mostly because it’s hard to leave the nation.  Easy targets.

Jones also points to the French government’s retreat on capital gains taxes as a victory for “[the] Tiebout [model against] progressivity” (I think that’s what the title of his post means). And here he entertains the suggestion that the fact that European tax systems are much less progressive than America’s is explained by Tiebout competition. Since the EU has open borders, wealthy elites can shop among jurisdictions. I don’t know enough about European tax politics to affirm or deny the causal link here, but it fits the theory. An international comparison of corporate tax rates also suggests that Tiebout competition is at work. From the Tax Foundation’s blog, here are “Corporate Income Tax Rates Around the World.”

Country Corporate Tax Rate in 2000[1] Rank in 2000 Corporate Tax Rate in 2006 Rank in March 2006
Japan 40.9 3 39.5 1
United States[2] 39.4 6 39.3 2
Germany 52 1 38.9 3
Canada 44.6 2 36.1 4
France 37.8 7 35 5
Spain 35 11 35 5
Belgium 40.2 4 34 7
Italy 37 9 33 8
New Zealand 33 16 33 8
Greece 40 5 32 10
Netherlands 35 11 31.5 11
Luxembourg 37.5 8 30.4 12
Mexico 35 11 30 13
Australia 34 14 30 13
Turkey 33 16 30 13
United Kingdom 30 21 30 13
Denmark 32 18 28 17
Norway 28 26 28 17
Sweden 28 26 28 17
Portugal 35.2 10 27.5 20
Korea 30.8 20 27.5 20
Czech Republic 31 19 26 22
Finland 29 24 26 22
Austria 34 14 25 24
Switzerland 24.9 28 21.3 25
Poland 30 21 19 26
Slovak Republic 29 24 19 26
Iceland 30 21 18 28
Hungary 18 30 16 29
Ireland 24 29 12.5 30
OECD Average[3] 33.6 28.7

Note that the US has the second-highest (after Japan) corporate income tax rate in the OECD. This is counter-intuitive, since ideologically the US has a reputation for being free-marketeer and pro-business, with a comparatively thin welfare state and less regulation. But if international Tiebout competition is at work, this pattern is sort of what you’d expect. The US is big and geographically isolated, so corporations based in the US won’t find it very easy to hop the border. European countries face steeper competition from other jurisdictions, so companies are relatively mobile.

Open borders would make international Tiebout competition a more effective force for disciplining governments’ redistributive impulses. But here I don’t mean primarily unilateral open borders, nor open borders with very poor countries. The US government is not likely to cut taxes on the wealthy for fear that they’ll emigrate to Rwanda, or even Mexico. But it might someday cut taxes to keep the wealthy from moving to Hong Kong, or Italy, or some yet-to-be-founded futuristic free charter city. If the right to emigrate were made a global reality, international Tiebout competition might start to matter a lot.

Continue reading International Tiebout competition