Minimum taxes and repeated tax competition

An agreement about a lower bound for admissible tax rates can reduce the equilibrium tax rate (and thus welfare) in tax competition among fully symmetric countries. This is shown in an infinitely repeated game where the stage game describes the standard tax competition model with source-based taxes and symmetric countries. Repeated interaction may allow countries to sustain cooperation through implicit contracts. Lower bounds on tax rates (‘minimum taxes’) restrict the ability of countries to punish deviators. This makes cooperation harder to sustain. The introduction of a lower bound on feasible tax rates may thus harm all countries.     

International tax competition with endogenous sequencing

This paper examines endogenous timing in an international tax competition model. Unlike existing studies, governments are assumed to decide not only tax rates but also whether they are set early or late. The Nash equilibrium provides four conclusions for alternative double tax allowances. First, tax deductions cause simultaneous tax competition, whereas tax credits yield sequential tax competition. Second, any double taxation relief would generate capital trade. Third, a credit system could maximize one country’s economic welfare but would lower another country’s economic welfare more than a deduction regime. Fourth, a home country’s government would choose credit regimes under a maximax rule, but select deduction methods under minimax and maximin rules, while all double tax allowances are indifferent to a host country. The findings resolve the question raised by Bond and Samuelson (Economic Journal 99:1099–1111, 1989) of why governments choose tax credits when tax deductions are clearly better. Namely, this paper shows that one country is better off but another is worse off with credits rather than deductions. Accordingly, we cannot clearly specify whether governments choose credit systems or deduction regimes. The possible double tax allowances employed by the governments depend on their own decision criterion.     

Relationship between tax compliance internationally and selected determinants of tax morale

Tax compliance has been studied by analyzing the individual decision of a representative person between planning and evading taxes. A neglected aspect of tax compliance is the impact of a social contract on tax morale. Such implicit contract between the individual and the state guaranteeing a high level of economic freedom, effective competition laws, an important equity market and high moral norms, is hypothesized to have a positive impact on tax compliance. In this paper, empirical evidence based on data from 30 countries indicate that tax compliance internationally is positively related to the level of economic freedom, the level of importance of the equity market and the effectiveness of competition laws and high moral norms.     

A welfare comparison of ad valorem and unit tax regimes

This paper strives to merge two strands of the literature. The first group of papers compares ad valorem and unit taxes in a tax competition framework in terms of welfare. The second group of papers regards capital income taxes as a conjunction of taxes on pure profits and taxes on capital income. We find that, given decreasing returns to scale, there always exists a level of the share of deductible capital costs strictly smaller than one, such that for all values larger than this threshold, an ad valorem tax regime unambiguously Pareto-dominates a unit tax regime.     

Federal tax competition and the efficiency consequences for local taxation of revenue equalization

Recent work has shown that a system of equalization grants can neutralize the efficiency loss caused by tax competition among lower-level governments. These models, however, ignore the vertical tax externalities that occur when the federal and lower-level governments levy taxes on the same base. This paper incorporates equalization grants into a standard capital tax competition model in which there are horizontal tax externalities between jurisdictions and vertical tax externalities between the levels of government. It is shown that, even in the presence of vertical tax externalities, an efficient level of lower-level government taxation can be achieved with a modifying version of a standard equalization grant formula.     

Asymmetric capital tax competition and choice of tax rate

This article provides an alternative mechanism that explains differences in capital tax rates, which applies to small jurisdictions. In the framework of standard capital tax competition models, regions have to be large, in the sense of having market power, otherwise they will tax capital, a mobile factor, at the same rate. In this paper, we consider a second mobile factor, labor, which is mobile only within metropolitan areas. We will show that this spatially limited mobile factor may explain the capital tax rate differences levied on the global mobile factor as long as no source-based wage tax is available. In addition to the theoretical treatment, numerical simulations also confirm this result and show a significant tax differential.     

Entry in tax competition: a note

This paper extends the tax competition analysis of public inputs to the case where the number of regions that compete for business investment is endogenous. To determine the number of competing regions, a fixed cost of regional development is introduced into the Zodrow–Mieszkowski model of public-input provision. It is shown that allowing for region entry does not affect the analytical results of inefficient public-input provision under tax competition. This paper also shows that the equilibrium number of competing regions is inefficient.     

Profit tax competition and formula apportionment

We analyze corporate income tax competition with international capital mobility when the common tax base is allocated to governments according to an apportionment formula. Labor can be either internationally mobile or immobile. We compare the Nash equilibria for different apportionment methods. Tax competition produces lower tax rates the more elastically the formula share responds to tax rate changes. More specifically, equilibrium tax rates are typically lowest when apportionment is based on property-shares, followed by payroll- and sales-shares apportionment. Compared to their cooperative levels, equilibrium tax rates are too low for property-share apportionment but tend to be too high for the other formulas. JEL Classification H77 · H25 · F23     

Mobile tax base as a global common

If countries anticipate international Bertrand competition in tax rates, they may expend effort that makes some of their taxpayers less mobile or increases the mobility of taxpayers elsewhere. Piecemeal evidence on what activities countries use is provided. Such activities are analyzed that interact with Bertrand tax competition if the size of the groups of loyal and nonloyal citizens or investors is endogenous. Further, the implications of tax harmonization and minimum taxes for these types of nonprice competition are considered. Home attachment reduces the intensity of tax competition, but generates a strategic disadvantage for the country that invests much in such home attachment. Harmonization of taxes and high minimum taxes can intensify countries’ investment in home attachment.      

Tax competition and tax base equalization in the presence of multiple tax instruments

The literature on tax competition has argued that tax base equalization, which reduces regional disparities in tax bases, can serve as a means of internalizing horizontal and vertical fiscal externalities. This argument assumes that each government relies on a single tax base (a regional tax on mobile capital and a federal tax on savings). This paper considers the case in which a distortionary labor tax is also available. Internalizing fiscal externalities requires that while the regional capital tax base is fully equalized, a region’s equalization entitlement for the labor tax is positive when its tax base is “larger” than the average tax base of all regions. This efficient tax base equalization system is incompatible with the primary objective of fiscal equalization.

     

Asymmetric tax competition in the presence of lobbying

This paper incorporates the influence of interest groups into the asymmetric tax competition model to explain the phenomenon that small countries do not necessarily set lower capital tax rates than large countries. In addition to the efficiency effect considered by the standard model, which leads the smaller country to set a lower capital tax rate, this present paper also takes account of the political effect arising from lobbying. We show that the smaller country may face less downward political pressure. If the political effect outweighs the efficiency effect, then the smaller country sets a higher tax rate than the larger country. This result has several welfare implications, which are in contrast to the conventional consequences.     

Causes,benefits, and risks of business tax incentives

This paper provides an updated overview of tax incentives for business investment. It argues that tax competition is likely to be a major force driving countries’ tax reforms, and discusses tax incentives as a possible response to this. This is complemented by more detailed arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country’s circumstances.     

Pillar 2: tax competition in low-income countries and substance-based income exclusion

Pillar 2 of the OECD's global tax reform proposal will have significant direct and indirect impacts for low-income developing countries (LICs). Most interesting and problematic is the question as to how the global anti-base erosion (GloBE) rules for a proposed global minimum effective tax will affect tax competition behaviour in LICs, and how LICs should respond when a critical mass of higher-income economies adopt the new structure. Most LICs are source-only countries, and they are very much in competition to attract foreign direct investment. Do LICs want to continue to compete using the tax system to the extent possible, to step back from that competition, or to take some intermediate course? Pillar 2 does not itself change a country's desired position on the competition spectrum – it merely affects how, and to what extent, that position can still be obtained. This paper posits that LICs should adopt qualified domestic minimum top-up taxes, and that this will not itself have a negative impact on their competitiveness. The primary focus of the paper, however, is on the design of the substance-based income exclusion (carve-out), examining the following three questions. Should the GloBE have been designed without a carve-out? Would there have been a better way of designing it? How will LICs be affected? The paper concludes that, as little real advantage is likely to accrue to LICs from intangible assets, minimising tax competition for those assets will have relatively little impact on them; and that, from an economic efficiency standpoint, shifting the tax burden away from a normal return and toward economic rents – albeit imperfectly – is a reasonable solution.     

Empirical evidence on the effects of tax incentives

This paper considers two empirical questions about tax incentives: (i)?are incentives used as tools of tax competition and (ii)?how effective are incentives in attracting investment? To answer these, we prepared a new dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004. Using spatial econometrics techniques for panel data to answer the first question, we find evidence for strategic interaction in tax holidays, in addition to the well-known competition over the corporate income tax (CIT) rate. We find no robust evidence, however, for competition over investment allowances and tax credits. Using dynamic panel data econometrics to answer the second question, we find evidence that lower CIT rates and longer tax holidays are effective in attracting FDI in Latin America and the Caribbean but not in Africa. None of the tax incentives is effective in boosting gross private fixed capital formation.     

The effects of personality traits on digital transformation: Evidence from German tax consulting

Digitization is said to strongly disrupt business and professional life. Especially tax consulting has aroused public interest in this respect. Frey and Osborne (2017) even go so far as to predict that tax consulting will become obsolete. Although these statements are misleading without further interpretation, there is no denying the fact that some change in the accounting and tax profession is inevitable. In Germany, however, business digitization currently does not seem to be urgently necessary in the tax consulting field since this profession is protected by law from competition. Thus, by examining the digitization efforts of German tax consultants we are able to exclude almost all effects of outside pressure and therefore take a look at intrinsic motivation. This study focuses on psychological factors and explores the relationship between tax consultants' Big-Five personality and their level of digitization. Personality is measured using the ten-item Big-Five inventory provided by Rammstedt and John (2007). We develop a digital maturity model based on 20 questions relating to digitization in business and tax consulting. After carrying out a factor analysis, five factors are extracted. To interpret our results, we develop two business model transformation indices as well as an overall digitization index. Our analysis is based on a survey of 968 members of the chamber of tax consultants (Steuerberaterkammer) in Munich, Germany. We are able to show that tax consultants scoring high on extraversion and openness to experience and low on neuroticism exhibit a higher level of digitization. This is, to the best of our knowledge, the first study to discuss intrinsic motivation and digitization in an accounting context. Moreover, an index for digitization as a whole and two business model transformation indices are provided, shedding light upon a hard-to-grasp phenomenon.     

Education policy and tax competition with imperfect student and labor mobility

This paper analyzes the effect of increasing human-capital mobility—i.e. student and labor mobility—on net tax revenues when revenue-maximizing governments compete for human capital by means of income tax rates and amenities offered to students (positive expenditure) or rather tuition fees (negative expenditure). An increase in labor mobility implies neither an intensified tax competition nor an erosion of revenues. In fact, the equilibrium tax rate even increases in labor mobility. Amenities offered to students are non-monotonically related to labor mobility; overall, net revenues increase with labor mobility. An increase in student mobility, however, erodes revenues, mainly due to intensified tax competition. A concurrent cutback in expenditures mitigates this erosion but cannot fully prevent it.     

Tax competition and fiscal equalization under corporate income taxation

This paper challenges the view that tax base equalization by the so-called representative tax system (RTS) removes inefficient undertaxation in corporate tax competition. The innovation of the paper is that it focuses on a tax on corporate income, instead of the unit tax on capital considered in previous studies. We employ a tax competition model with fiscal equalization and show that the RTS fails to fully internalize pecuniary and fiscal externalities. As a consequence, the RTS yields inefficiently low tax rates in the Nash equilibrium of the tax competition game between governments. Tax revenue equalization performs even worse, but combined with equalization of private income it implements the efficient tax rates on corporate income.     

Why hasn’t tax competition triggered a race to the bottom? Some quantitative lessons from the EU

The integration of European financial markets in the early 1980s created an environment of near-perfect capital mobility across countries that had harmonized indirect taxes but maintained large differences in factor taxes. The years that followed witnessed several rounds of competition in capital taxes with puzzling results. Instead of the dreaded “race to the bottom” in capital taxes, the UK lowered its capital tax to a rate closer to those of France, Germany and Italy, while capital taxes changed slightly in these countries. The UK increased its labor tax marginally, but the other countries increased theirs sharply. This paper shows that these results are consistent with the quantitative predictions of a dynamic, Neoclassical general equilibrium model of tax competition that incorporates the key international externalities of tax policy operating via relative prices, wealth distribution and fiscal solvency. Tax competition is modeled as a one-shot game over time-invariant capital taxes with dynamic payoffs relative to a status quo calibrated to European data. The calibration is preceded by an empirical analysis that shows that the relationship linking taxes to labor supply and the investment rate in the model are in line with empirical evidence and that domestic taxes seem to respond to foreign taxes. The solutions of the games show that when countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency, there is no race to the bottom and the Nash equilibrium is close to observed taxes. In contrast, if consumption taxes adjust to maintain fiscal solvency, competition over capital taxes triggers a “race to the bottom,” but this outcome entails large welfare gains. Surprisingly, the gains from coordination are small in all of these experiments.     

Property tax interaction among overlapping local jurisdictions: quasi-experimental evidence from school bond referenda

International Tax and Public Finance - This study aims to extend the study of property tax competition to a highly fragmented local context. Applying the tax competition theory to the property tax,...     

Agglomeration,tax competition,and fiscal equalization

This paper analyzes the impact of fiscal equalization on asymmetric tax competition when positive agglomeration externalities are present. It uses a model focusing on the strategic reason for capital taxes to demonstrate that per capita fiscal capacity equalization improves the spatial allocation of capital provided a sufficiently rich (marginally) larger region and sufficiently strong agglomeration externalities. If tax revenue is used to finance public goods, per capita fiscal capacity equalization generally cannot simultaneously eliminate public good inefficiency and spatial inefficiency. However, the achievement of full efficiency for ex ante identical regions requires excessive (full) equalization in the presence (absence) of agglomeration externalities.