Symmetric tax competition and lobbying within federations

The present paper deals with the question of whether tax harmonization and federal taxation increase welfare in a symmetric tax competition framework with heterogeneous individuals and lobbying. A model closely related to the approach of Lai (2010) is linked to externalities that are familiar from conventional public finance. The observed deviations from efficient taxation are derived from the interplay of four externalities, which can be divided into two groups: externalities occurring due to tax competition and externalities which are caused by lobbying. Whether or not the centralization of tax competences is useful depends mainly on the relative sizes of the competition-induced and lobbying-induced externalities.