Economic Integration, Tax Erosion, and Decentralisation: An Empirical Analysis

Abstract

This paper addresses the issues of whether and how economic integration can affect the ability of the central governments to raise tax revenues and lead to a greater decentralisation of the public sector. To this purpose, a country-specific measure of tax erosion is derived. That is used as a determinant of the degree of fiscal federalism. We find that an increase of economic integration causes a decline of the implicit tax rates on mobile capital and the process of tax erosion positively contributes to the growth of public sector decentralisation.