The Macroeconomic Effects of Tax Competition: the Brazilian ``Fiscal War'' and Public Goods Underprovision

 

Social welfare and economic development can be hindered by an under-provision of public goods. This paper studies the role of fiscal wars between state governments in lowering overall welfare, public goods provision, and income levels. To do so I build a multi-region general equilibrium model with endogenous state taxes, local public expenditures, and firm location choices. I then estimate the model to match a novel dataset encompassing state-level tax cuts in Brazil. Under my most conservative estimates, I find that moving towards a centralized system of sales taxes would increase public goods provision by 21.29-27.53 percent, GDP per capita by 1.28-3.85 percent, and aggregate welfare by 0.96-3.73 percent. Tax centralization would, however, likely generate winners and losers and can be regressive.

The costs of buying a majority government

 

Executive branch representatives must garner support from elected legislative officials to govern. Building a legislative majority is an important stepping stone in most executive-branch mandates. This majority-building process may, however, impose significant costs upon society. Using a regression discontinuity design, I show that municipalities in Brazil whose mayors hold few seats in the municipal chamber experience substantially more turnover in their bureaucracy. RD estimates demonstrate that non-tenured civil servants are hired (+46.7\%) and fired (37.5\%) at substantially higher rates under minority mayors. This turnover is not confined to high-ranking government positions but extends to roles filled by both skilled and unskilled public servants. Using teacher and school principal surveys, I show that these new hires are generally inexperienced workers who fall short in indicators of job performance. Ultimately, municipalities that elect a mayor with limited legislative support experience a significant drop in standardized test scores (-0.048 to -0.073 std. dev.). Heterogeneous causal estimates are consistent with politicians using government job appointments as bargaining chips to acquire legislative support when their coalitions hold limited seats in the municipal chamber.