The Influence of Altruistic Preferences on the Race to the Bottom of Welfare States

Common public-finance models suggest that tax competition between welfare states leads to a zero-taxation outcome in the absence of migration costs or other barriers to migration. This paper develops a two-region framework with mobile altruistic taxpayers and immobile welfare recipients. Tax competition can support Nash equilibria in taxation that are nonzero, given sufficiently strong altruistic preferences. If regions are asymmetric with respect to the number of welfare recipients, Nash equilibria exist in which the region with the fewer poor attracts more taxpayers and sets higher taxes. This implies that rich regions have an advantage in and may benefit from tax competition.