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Abstract

We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization. Our analysis provides a rationale for the proposed creation of an Enhanced Cooperation Agreement on capital taxes within the European Union.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 1-2 (February)
Pages: 254-267

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:1-2:p:254-267

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Web page: http://www.elsevier.com/locate/inca/505578

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Find related papers by JEL classification:

• C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
• F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
• H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

References

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Citations

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Cited by:

1. Haufler, Andreas & Lülfesmann, Christoph, 2013. "Reforming an Asymmetric Union: On the Virtues of Dual Tier Capital Taxation," Discussion Papers in Economics 14358, University of Munich, Department of Economics.
   
   • Andreas Haufler & Christoph Lülfesmann, 2013. "Reforming an Asymmetric Union: On the Virtues of Dual Tier Capital Taxation," CESifo Working Paper Series 4076, CESifo Group Munich.
   • Haufler, Andreas & Lülfesmann, Christoph, 2012. "Reforming an Asymmetric Union: On the Virtues of Dual Tier Capital Taxation," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62082, Verein für Socialpolitik / German Economic Association.
2. Jun-ichi Itaya & Makoto Okamura & Chikara Yamaguchi, 2010. "Partial Tax Coordination in a Repeated Game Setting," CESifo Working Paper Series 3127, CESifo Group Munich.
3. Leon Bettendorf & Albert van der Horst & Ruud de Mooij & Hendrik Vrijburg, 2009. "Corporate tax consolidation and enhanced cooperation in the European Union," CPB Discussion Paper 132, CPB Netherlands Bureau for Economic Policy Analysis.
   
   • Leon Bettendorf & Albert Van Der Horst & Ruud A. De Mooij & Hendrik Vrijburg, 2010. "Corporate Tax Consolidation and Enhanced Cooperation in the European Union," Fiscal Studies, Institute for Fiscal Studies, vol. 31, pages 453-479, December.
   • Leon Bettendorf & Albert van der Horst & Ruud A. de Mooij & Hendrik Vrijburg, 2010. "Corporate tax consolidation and enhanced coorporation in the European Union," Working Papers 1001, Oxford University Centre for Business Taxation.
4. Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "On the desirability of tax coordination when countries compete in taxes and infrastructure," Working Papers 476, Bielefeld University, Center for Mathematical Economics.
   
   • Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "On the desirability of tax coordination when countries compete in taxes and infrastructures," CREA Discussion Paper Series 13-02, Center for Research in Economic Analysis, University of Luxembourg.
5. Alireza Naghavi, 2008. "Trade Sanctions and Green Trade Liberalization," Center for Economic Research (RECent) 011, University of Modena and Reggio E., Dept. of Economics.
   
   • Naghavi, Alireza, 2010. "Trade sanctions and green trade liberalization," Environment and Development Economics, Cambridge University Press, vol. 15(04), pages 379-394, August.
6. Jun-ichi Itaya & Makoto Okamuraz & Chikara Yamaguchix, 2009. "Partial tax coordination in a repeated game setting," Working Papers 2009/15, Institut d'Economia de Barcelona (IEB).

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