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The right-wing power of small countries

Summary This paper investigates the political implications of tax competition between countries of different sizes. We show that smaller countries competing for internationally mobile capital would set lower tax rates than their larger counterparts when run by similar governments. Moreover, small-country governments are actually politically to the right of those in larger countries, adding a second reason for lower tax rates in the former. Then a higher number of small countries competing for capital with large countries not only decreases the large-country tax rates on capital, but also results in more right-wing governments being elected. Small countries thus have ”right-wing power”.