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Efficient Tax Competition with Factor Mobility and Trade: A Note

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  • Giampaolo Arachi

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Abstract

This note shows that residence- and source-based taxes on capital income are not sufficient to sustain an efficient Nash equilibrium when several goods are internationally traded, apart from two special cases. With several traded commodities, domestic fiscal policies affect foreign welfare not only through changes in the world interest rate but also through changes in the equilibrium relative prices of traded commodities. In order to guarantee the existence of an efficient Nash equilibrium in the general case, additional tax instruments are required. In particular, destination-based taxes on traded commodities are needed to enable the government to control the relative commodity prices faced by domestic consumers. In addition, in order to shield domestic producers from changes in world prices, the government must levy either origin-based commodity taxes or taxes on the immobile factors. Copyright Kluwer Academic Publishers 2001

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File URL: http://hdl.handle.net/10.1023/A:1011272703142
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 8 (2001)
Issue (Month): 2 (March)
Pages: 171-188

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Handle: RePEc:kap:itaxpf:v:8:y:2001:i:2:p:171-188

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: tax competition; commodity taxation; capital taxation; efficiency of Nash equilibria;

References

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  1. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
  2. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  4. Andreas Haufler, 1996. "Optimal factor and commodity taxation in a small open economy," International Tax and Public Finance, Springer, vol. 3(4), pages 523-527, October.
  5. Assaf Razin & Efraim Sadka, 1989. "International Tax Competition and Gains from Tax Harmonization," NBER Working Papers 3152, National Bureau of Economic Research, Inc.
  6. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
  7. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  8. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
  9. Clemens Fuest & Bernd Huber, 1999. "Can Tax Coordination Work?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 443-, July.
  10. Kehoe, Patrick J, 1989. "Policy Cooperation among Benevolent Governments May Be Undesirable," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 289-96, April.
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Cited by:
  1. Julian Alworth & Giampaolo Arachi, 2008. "Taxation Policy in EMU - Julian Alworth and Giampaolo Arachi," European Economy - Economic Papers 310, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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