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A Quantitative Analysis of Tax Competition v. Tax Coordination under Perfect Capital Mobility

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Author Info
Enrique G. Mendoza (University of Maryland and NBER)
Linda L. Tesar (University of Michigan and NBER)

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Abstract

Theory predicts that strategically-determined tax rates induce negative externalities across countries in relative prices, the wealth distribution and tax revenue. This paper studies the interaction of these externalities in a dynamic, general equilibrium environment and its effects on quantitative outcomes of tax competition in one-shot games over capital income taxes between two governments that set time-invariant taxes and issue debt. Strategic payoffs correspond to welfare gains net of the cost of transitional dynamics in a standard neoclassical two-country model with exogenous balanced growth. The model is calibrated to European data for the early 1980s starting from a benchmark with symmetric countries. When countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency, the Nash equilibrium replicates calibrated taxes, suggesting that European taxes can be the outcome of Nash competition. When consumption taxes are adjusted to maintain fiscal solvency, competition triggers a “race to the bottom” in capital taxes but this outcome is welfare-improving relative to calibrated taxes. Sensitivity analysis shows that competition can produce a “race to the top” in capital taxes and that the United Kingdom can benefit from tax competition with Continental Europe. Surprisingly, the gains from coordination in all of these experiments are small.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 507.

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Length: 42 pages
Date of creation: 2003
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Handle: RePEc:mie:wpaper:507

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Dani Rodrik & Tanguy van Ypersele, 1999. "Capital Mobility, Distributive Conflict, and International Tax Coordination," NBER Working Papers 7150, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, Summer.
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  13. Persson, Torsten & Tabellini, Guido, 1995. "Double-Edged Incentives: Institutions and Policy Coordination," CEPR Discussion Papers 1141, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eva de Francisco, 2005. "Limited Participation, Income Distribution and Capital Account Liberalization," Computing in Economics and Finance 2005 454, Society for Computational Economics. [Downloadable!]
  2. Enrique G. Mendoza & Linda L. Tesar, 2004. "Winners and Losers of Tax Competition in the European Union," Working Papers 508, Research Seminar in International Economics, University of Michigan. [Downloadable!]
    Other versions:
  3. Souleymane COULIBALY, 2008. "Empirical Assessment of the Existence of Taxable Agglomeration Rents," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 08.01, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  4. Alexandre A. Porsse & Eduardo A. Haddad & Eduardo P. Ribeiro, 2006. "Modeling Interjurisdictional Tax Competition In A Federal System," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 54, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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  5. Günter Coenen & Peter McAdam & Roland Straub, 2007. "Tax reform and labour-market performance in the euro area - a simulation-based analysis using the New Area-Wide Model," Working Paper Series 747, European Central Bank. [Downloadable!]
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  6. Huizinga, Harry & Nielsen, Søren Bo, 2004. "Must losing taxes on saving be harmful?," Working Papers 15-2004, Copenhagen Business School, Department of Economics. [Downloadable!]
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  7. Mihir Desai & Devesh Kapur & John McHale, 2004. "Sharing the Spoils: Taxing International Human Capital Flows," Asia-Pacific Financial Markets, Springer, vol. 11(5), pages 663-693, September. [Downloadable!] (restricted)
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