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Unemployment and endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax

Author

Listed:
  • Yuya Kikuchi

    (Chubu University)

  • Toshiki Tamai

    (Nagoya University)

Abstract

This paper examines the endogenous choice of unit and ad valorem taxes in a model of tax competition with unemployment. Governments maximize objective functions that are a weighted sum of regional welfare and revenue. In the tax competition model, a high fixed wage rate generates unemployment and employment externalities. This effect can be either positive or negative because of freely mobile capital among regions. Without unemployment, revenue-maximizing governments choose unit taxes as their tax instrument to avoid revenue losses from intense tax competition under ad valorem taxes. However, with unemployment, positive employment externalities generate additional benefits for using ad valorem taxes to stimulate employment. Therefore, the present study shows that one region chooses an ad valorem tax, whereas the other chooses a unit tax, or that both governments use ad valorem taxes depending on employment externalities.

Suggested Citation

  • Yuya Kikuchi & Toshiki Tamai, 2024. "Unemployment and endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 533-551, April.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:2:d:10.1007_s10797-023-09785-x
    DOI: 10.1007/s10797-023-09785-x
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    More about this item

    Keywords

    Tax competition; Unit tax; Ad valorem tax; Unemployment;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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