Global public goods, fiscal policy coordination, and welfare in the world economy

Abstract

A two-region endogenous growth model of the world economy with local and global public goods is used to study strategic interactions between national policymakers. Distortionary taxes are used to finance infrastructure investment at home and generate resources for vaccine production by a global fund. While the global public good is nonexcludable, it is partially rival. Optimal tax rates under cooperation and noncooperation are solved for analytically, under both financial autarky and openness, and numerical experiments are performed to evaluate the welfare gain from cooperation. Whether optimal levies are higher or lower under cooperation, and the magnitude of welfare gains, depend on the degree of integration of capital markets, the existence of a direct trade-off between expenditure components, and the nature of the tax base. When the health levy takes the form of a capital or wealth tax, cooperation is welfare-improving under both autarky and financial openness, but enforcement and collection costs may narrow the scope of taxation under all policy regimes.