The Role of Symmetry between the Revenue and the Expenditure Side of the Government Budget in the Debate about the Potential Negative Effects of Tax Competition

The effects of capital tax competition are reconsidered in this paper incorporating the argument that the expenditure structure of public budget should reflect its revenue structure. The paper offers a small open economy model where capital and labour tax revenues are used exclusively on the provision of public inputs. It is shown that if the revenue side of the government budget exactly matches the expenditure side that is if industrial public goods are financed by both private production factors with the weights reflecting the contributions of public inputs to the private factor productivity then public inputs are provided optimally even in the presence of tax competition.     

Fiscal centralization versus decentralization: Growth and welfare effects of spillovers, Leviathan taxation, and capital mobility

This paper develops an endogenous growth model with spillovers of public goods, Leviathan taxation, and mobile capital to examine the relative merits of centralized and decentralized fiscal systems for economic growth and social welfare. We show that a decentralized system dominates a centralized system in terms of economic growth; however, the difference in social welfare between a decentralized and a centralized system is non-monotonic and displays a hump-shaped relationship with respect to capital mobility. Since higher capital mobility induces stronger tax competition, this finding implies that there is an optimal degree of tax competition; some tax competition is desirable, but fierce tax competition may be harmful. We also show that there is a critical level of spillovers of public goods above which centralization dominates decentralization in terms of social welfare, as in previous studies; however, if spillovers are below this critical level, capital mobility also matters in the welfare comparison between centralized and decentralized systems.     

Mobile Labor, Multiple Tax Instruments, and Tax Competition

The tax competition literature shows that local governments keep property tax rates inefficiently low to prevent capital outflows, thereby underproviding local public goods. This paper adds mobile labor and an alternative tax instrument to the model. Jurisdictions have access to a property tax levied on land and capital, plus either a head tax or a labor tax. Scale economies in public good provision create incentives to use the property tax, but these incentives are not accompanied by increased incentives to underprovide public goods. In contrast, underprovision is associated with the use of a distortionary labor tax.     

Redistribution and regional development under tax competition

This paper considers how capital tax competition affects transfer and development policies in the presence of regional income disparity. In each country, development policies determine the number of rich (poor) regions that (do not) engage in production activities, while transfer policies redistribute income between rich and poor regions. The mix of transfer and development policies is inefficient under tax competition: conditional on the equilibrium tax rate, too much revenue is spent on development policies and too little on transfer policies. This analysis of the expenditure mix implies that development policies are used as a means of regional redistribution even if transfer policies are efficient instruments for this purpose. Moreover, it is shown that the overall level of public expenditure may be too high because of the possibility of over-development.     

A note on tax competition in the presence of agglomeration economies

This paper analyzes tax competition in the presence of agglomeration effects. The obtained results are then compared to the results of the traditional model, without agglomeration effects. As is well known, the presence of a fiscal externality affects the provision of the public good in the standard competitive model of tax competition. In the model with agglomeration effects, in addition to this externality, a new effect shows up. This effect reflects heightened government concern about capital flight, which depresses firm productivity by limiting external economies of scale. As a result, capital tax rates end up being lower than in the case where agglomeration effects are not present, worsening the underprovision of the public good. This conclusion holds in both the competitive and strategic versions of the model.     

Coordination of capital taxation among asymmetric countries

This paper studies international fiscal coordination in a world of integrated markets and sovereign national governments. Mobile capital and immobile labor are taxed in order to finance a fixed budget. This generates productive inefficiency. Two fiscal reforms are considered: a minimum capital tax level and a tax range, i.e., a minimum plus a maximum capital tax level. It is shown that the introduction of a lower bound to the capital tax level is never preferred to fiscal competition by all countries while there always exists a combination of both a lower and an upper bound (i.e., a tax range) which is unanimously accepted.     

The new view of the property tax A reformulation

The ‘new view’ of the property tax is reformulated within the context of a model with interjurisdictional competition, endogenous local public services, individuals who are segregated into homogeneous communities according to tastes for local public services, a simple form of land use zoning, and a political or constitutional constraint on the use of head taxes by local governments. Expressions for the ‘profits tax’ and ‘excise tax’ effects of the property tax are derived. The effects of a ‘consumption distortion’ away from government services due to local reluctance to tax mobile capital are also examined.     

Tax Competition and Revelation of Preferences for Public Expenditure

This paper considers a federal country composed of local jurisdictions that differ in their inhabitants' tastes for public goods, and which finance local public expenditure through a source-based tax on capital income. The taste for public goods is the private information of local governments. The central government seeks an optimal policy, in which grants to local governments are conditioned on local tax rates. The uninformed central government seeks both to allocate capital efficiently among jurisdictions, and to induce jurisdictions to provide an efficient mix of private and public consumption. It is shown that there persist at this constrained optimum both some misallocation of capital and some violation of the Samuelson rule for optimal public good provision in every jurisdiction.     

Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy

This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la (Osborne and Slivinski, 1996) and (Besley and Coate, 1997). As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity.     

Tax competition in a fiscal union with decentralized leadership

This paper examines capital tax competition in the presence of an interstate transfer policy without federal commitment. Lack of commitment implies that local tax policy is chosen prior to federal transfers. The paper's main result is that ex-post federal policy neutralizes horizontal fiscal externalities, insulating tax policy from capital mobility. Federal policy, however, introduces a new source of inefficiency unrelated to tax competition. Specifically, ex-post transfer payments prove to be equivalent to an interstate revenue-sharing system which may render federal intervention in the presence of fiscal externalities welfare-deteriorating relative to tax competition.     

Interregional tax competition and intraregional political competition: The optimal provision of public goods under representative democracy

This paper explores the implications of the interaction between interregional tax competition and intraregional political competition for the optimal provision of public goods under representative democracy à la Osborne and Slivinski, 1996, Besley and Coate, 1997. As an extension of Hoyt’s (1991) finding that intensified tax competition is always harmful and aggravates the extent to which public goods are undersupplied in a region, we show that intensified tax competition can be beneficial if political as well as tax competition is considered. In particular, we identify plausible conditions under which (i) there is an optimal intensity of tax competition such that the interaction between interregional tax competition and intraregional political competition will result in the optimal provision of public goods and (ii) intensified tax competition will be beneficial if and only if the degree of tax competition is less than this optimal intensity.     

Even small trade costs restore efficiency in tax competition

We introduce transport cost of trade in products into the classical Zodrow and Mieszkowski (1986) model of capital tax competition. It turns out that even small levels of transport cost lead to a complete breakdown of the seminal result, the underprovision of public goods. Instead, there is a symmetric equilibrium with efficient public goods provision in all jurisdictions.     

我国企业所得税整合与应对国际税收竞争的策略探析

本文认为,随着经济全球化的发展,资本在国际间的流动日益频繁,各国利用税收手段吸引流动资本的竞争也日益加剧。我国经济整体开放程度的提高将使我国经济日益融入到世界经济体系之中,客观上要求我国的税收政策必须与国际惯例接轨。我国现行的差异性企业所得税税收制度背离了WTO所要求的公平竞争的基本原则。因此,应就如何整合内外资企业所得税制的问题进行探讨和研究,以完善我国企业所得税政策,提高国际竞争力。     

TAX COMPETITION AS A CAUSE OF FALLING CORPORATE INCOME TAX RATES: A SURVEY OF EMPIRICAL LITERATURE

Abstract Since the mid 1980s, tax rates on corporate income have declined in most industrialized countries. Tax competition between countries for mobile capital has frequently been mentioned as an explanation for this development. A vast empirical literature dealing with tax competition for mobile capital has emerged. This paper categorizes and summarizes the existing empirical studies on this issue. Particular focus is placed on the isolation of the substantive implications the quantitative study outcomes convey. Given the empirical evidence surveyed, it appears that tax rates indeed decline due to tax competition between countries, and in particular due to competition for profits. In addition to summarizing the substantive implications of the existing empirical literature, the paper addresses the question of whether the existing studies can convincingly isolate tax competition as a driver of falling corporate income tax rates.     

Why is there so little tax coordination? The role of majority voting and international tax evasion

It is a striking feature of EU tax policy that countries find it difficult to agree on capital tax coordination. This is in conflict with the prevailing theoretical view, according to which tax coordination is beneficial. This paper develops a political economy argument which may help to explain this puzzle. We consider a model of tax competition where fiscal policy decisions are taken via majority voting and tax evasion is possible but costly. It turns out that tax coordination agreements may fail to generate political support because middle income groups may lose from tax coordination, even if their capital income is below average.     

Local business taxation and competition for capital: the choice of the tax rate

A theoretical model describes the local choice of the tax rate on capital income. It establishes preferences and various fiscal conditions — including the tax rates of competing jurisdictions — as determinants of the tax rate. The empirical implications are tested using a large panel of jurisdictions in Germany, which have discretion in setting the local rate of the business tax. Tax competition is identified by means of instrumental variables techniques. Despite significant competition effects between local neighbors, where tax rates are strategic complements, jurisdictions are found to have some leeway in using the tax rate as an instrument of their policy. In particular, large jurisdictions set higher tax rates in interjurisdictional competition.     

Public spending and optimal taxes without commitment

We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitly the constraint that at no point in time the revision of the original tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the difference in tax rate between the second and third best policy for a wide range of parameters. For some of these the difference between the second and third best tax rates is large, and so are the associated rates of economic growth.     

Lowering the Marginal Corporate Tax Rate: Why the Debate?

In an effort to attract new investors and retain existing producers, governments use corporate tax rates as a policy tool for industrial recruitment, resulting in inter‐state tax competition. Foreign direct investment (FDI) growth and GDP growth are the two policy outcomes gauged in inter‐state tax competition. The assumption is that lower corporate taxes lead to increases in FDI, which results in capital formation that generates GDP growth. This 60‐nation panel study tests that assumption through examining economic indicators contingent on taxation, such as FDI and mergers and acquisitions among multinational corporations between 1999 and 2009. The results suggest that reduced corporate tax rates can increase FDI but decrease annual GDP growth. The main policy implication is that tax competition may attract investment, but may not promote overall economic growth, offering support for value‐extraction theories.     

Tax competition,uniform assessment,and the benefit principle

In previous discussions it has been argued that tax competition between local governments results in a tax burden on business that is less than the cost of public services for business and in suboptimal levels of public expenditures for residents. However, this conclusion has never been substantiated by a full theoretical treatment. Here a theoretical model of tax competition is developed between metropolitan areas, with labor perfectly immobile and two local public goods, one for residents and one for business. For “plausible” parameter values, numerical solutions of the optimality conditions are computed by means of a nonlinear programming algorithm.