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A Simple Two-Country Model of Redistributive Capital Income Taxation

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  • LOPEZ, Salvador

    (Universidad Autonoma de Barcelona. Departamento de Economia Aplicada)

  • MARCHAND, Maurice

    ()
    (CORE and lAG, Université catholique de Louvain)

  • PESTIEAU, Pierre

    ()
    (Universite de Liege and CORE, Universite catholique de Louvain)

Abstract

This paper presents a simple two-country model with mobile capital and immobile labour, in which there are two classes of individuals, the workers and the capital owners. A source-based tax on capital income is used to finance transfers to workers. If the two countries are homogeneous in all respects (preferences for equity, population size, and social composition), capital income is shown to be undertaxed at the non-cooperative equilibrium relative to the autarkic situation. In the case of heterogeneous countries, it can be either undertaxed or overtaxed: our simple setting enables us to obtain an easy-to-interpret formula for each country's capital income tax, and numerical examples indicate how the two countries' tax decisions interact at the noncooperative equilibrium. The normative issue of imposing minimal tax standards across countries is also analyzed. The paper provides conditions under which enforcing such policy will be beneficial to all countries.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1996025.

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Date of creation: 01 May 1996
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Handle: RePEc:cor:louvco:1996025

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Cited by:
  1. Ypersele, T.P.M.C. van, 1998. "Coordination of Capital Taxation Among a Large Number of Asymmetric Countries," Discussion Paper 1998-137, Tilburg University, Center for Economic Research.
  2. Jeffrey Carpenter & Stephen Burks & Lorenz Götte, 2006. "Performance Pay and the Erosion of Worker Cooperation: Field experimental evidence," Middlebury College Working Paper Series 0603, Middlebury College, Department of Economics.
  3. Pestieau, Pierre, 1996. "Politique sociale, redistribution et intégration économique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(3), pages 275-289, septembre.
  4. Cremer, Helmuth & Pestieau, Pierre, 2002. "Factor Mobility and Redistribution: A Survey," IDEI Working Papers 154, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
  5. Marja Appelman & Joeri Gorter & Mark Lijesen & Richard Venniker & S. Onderstal, 2003. "Equal rules or equal opportunities? Demystifying level playing field," CPB Document 34, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Thierry Warin & André Fourçans, 2006. "Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View," Middlebury College Working Paper Series 0604, Middlebury College, Department of Economics.
  7. André Fourçans & Thierry Warin, 2001. "Tax Harmonization versus Tax Competition in Europe: A Game Theoretical Approach," Cahiers de recherche CREFE / CREFE Working Papers 132, CREFE, Université du Québec à Montréal.

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