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On the timing of tax and investment in fiscal competition models

Author

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  • Hindriks, Jean

    (Université catholique de Louvain, CORE, Belgium)

  • Nishimura, Yukihiro

    (Osaka University, Graduate School of Economics, Japan)

Abstract

We study a model in which asymmetric regions compete for capital with both public investments and taxes. Public investments are chosen in the first stage, and then source income taxes are set in the second stage. Public investments increase the productivity of capital and they also serve to stake out a positive advantage in the tax competition stage. In standard theories of tax competition, investments and taxes were assumed to be chosen simultaneously. Comparing our approach to earlier theory, we show that regions prefer to choose investment before taxes. We also show that sequential choice of taxes is preferable to simultaneous choice of taxes, and that modulo sufficient asymmetry among regions, the simultaneous choice of investment is preferable to the sequential choice of investments. Our theoretical prediction is that both taxes and public investments are distorted downwards in equilibrium.

Suggested Citation

  • Hindriks, Jean & Nishimura, Yukihiro, 2014. "On the timing of tax and investment in fiscal competition models," LIDAM Discussion Papers CORE 2014065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2014065
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    References listed on IDEAS

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    Cited by:

    1. Mattéo Godin & Jean Hindriks, 2015. "A Review of critical issues on tax design and tax administration in a global economy and developing countries," BeFinD Working Papers 0107, University of Namur, Department of Economics.
    2. Jean J. Gabszewicz & Marco A. Marini & Ornella Tarola, 2015. "Alliance Formation in a Vertically Differentiated Market," DIAG Technical Reports 2015-06, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    3. Mouchart, M. & Wunsch, G. & Russo, F., 2015. "The issue of control in multivariate systems A contribution of structural modelling," LIDAM Discussion Papers CORE 2015029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Balandraud, Eric & Queyranne, Maurice & Tardella, Fabio, 2015. "Largest minimally inversion-complete and pair-complete sets of permutations," LIDAM Discussion Papers CORE 2015009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Mouchart, M. & Wunsch, G. & Russo, F., 2015. "The issue of control in multivariate systems, A contribution of structural modelling," LIDAM Discussion Papers ISBA 2015019, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).

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    More about this item

    Keywords

    endogeneous timing; tax competition; public investments;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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