The Effects of Tax Competition on Public Expenditure and Expenditure Competition

International trade and financial liberalization has led to a growing interdependence of fiscal policies. Particularly, capital mobility seems to have important implications for the size and composition of government spending. In order to attract firms and investments governments will compete with low taxes and high spending on business-friendly, productive -enhancing public goods. In a noncooperative equilibrium, not only the aggregate govenment spending will be inefficient but also the composition. Governments will over-provide public inputs and under provide consumption goods.