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Tax Competition, Capital Mobility and Public Good Provision Within a Trading Block

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  • Costas Hadjiyiannis
  • Panos Hatzipanayotou
  • Michael S. Michael

Abstract

We construct a general equilibrium model of a two-country trading block where governments through tax policies attract mobile capital, and provide an imported public consumption good. At Nash equilibrium, when the public good is under-provided, (i) a country with a large GDP, has a large Nash equilibrium income tax rate, (ii) if initially the existing foreign capital in the country is zero or small, then the country with a large population or high individual marginal willingness to pay for the public good has a large Nash equilibrium income tax rate. When the two countries act cooperatively, then for each country, the cooperative optimal income tax rate is positive, and if they are identical then the cooperative income tax rate is greater than the Nash. When the two countries are different, then it is possible that the cooperative income tax rate is less than the Nash.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 524.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_524

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Keywords: Nash and cooperative income taxes; capital mobility; public goods;

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  1. 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.
  2. Dhillon, Amrita & Perroni, Carlo & Scharf, Kimberley A., 1999. "Implementing tax coordination," Journal of Public Economics, Elsevier, vol. 72(2), pages 243-268, May.
  3. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  4. Ravi Kanbur & Michael Keen, 1991. "Jeux Sans Frontieres: Tax Competition and Tax Coordination when Countries Differ in Size," Working Papers 819, Queen's University, Department of Economics.
  5. MINTZ, Jacques & TULKENS , Henry, 1994. "Optimality Properties of Alternative Systems of Taxation of Foreign Capital Income," CORE Discussion Papers 1994078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Andreas Haufler & Ian Wooton, . "Country Size and Tax Competition for Foreign Direct Investment," Working Papers 9702, Business School - Economics, University of Glasgow.
  7. WILDASIN, David, . "Nash equilibria in models of fiscal competition," CORE Discussion Papers RP -804, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Journal of Public Economics, Elsevier, vol. 71(3), pages 441-458, March.
  9. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  10. King, Mervyn A., 1986. "A pigovian rule for the optimum provision of public goods," Journal of Public Economics, Elsevier, vol. 30(3), pages 273-291, August.
  11. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  12. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Munich Reprints in Economics 19402, University of Munich, Department of Economics.
  13. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November.
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Cited by:
  1. Costas Hadjiyiannis & Panos Hatzipanayotou & Michael S. Michael, 2004. "Pollution and Capital Tax Competition within a Regional Block," CESifo Working Paper Series 1208, CESifo Group Munich.

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