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The International Macroeconomics of Taxation and the Case Against European Tax Harmonization

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Author Info
Enrique G. Mendoza

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Abstract

The theory of international macroeconomics shows that domestic tax policy in a global economy affects foreign economic conditions via complex, dynamic interactions through relative prices, tax revenues, and wealth distribution. This paper proposes a tractable quantitative framework for assessing tax policies that is consistent with this theory. The significance of the international transmission channels of tax policy is evaluated in the context of a 'workhorse' two-country dynamic general equilibrium model. The model is used to assess the potential effects of the European harmonization of capital income taxes. The results show that this policy, if enacted along the lines followed in harmonizing value-added taxes, yields large capital outflows and a significant erosion of tax revenue for Continental Europe while the opposite effects benefit the United Kingdom. Welfare in the United Kingdom rises as result, while Continental Europe may incur a substantial welfare cost.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8217.

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Date of creation: Apr 2001
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Handle: RePEc:nbr:nberwo:8217

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Find related papers by JEL classification:
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
H2 - Public Economics - - Taxation, Subsidies, and Revenue

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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. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December. [Downloadable!] (restricted)
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  2. Willem H. Buiter, 1987. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Jeremy Greenwood & Kent P. Kimbrough, 1985. "Capital Controls and Fiscal Policy in the World Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 743-65, November. [Downloadable!] (restricted)
  4. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
  5. Mendoza, Enrique G & Tesar, Linda L, 1998. "The International Ramifications of Tax Reforms: Supply-Side Economics in a Global Economy," American Economic Review, American Economic Association, vol. 88(1), pages 226-45, March. [Downloadable!] (restricted)
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  6. Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Assaf Razin & Efraim Sadka, 1990. "Integration of the International Capital Markets: The Size of Government and Tax Coordination," NBER Working Papers 2863, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September. [Downloadable!] (restricted)
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  9. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
  10. Jacob A. Frenkel & Assaf Razin, 1986. "The International Transmission and Effects of Fiscal Policies," NBER Working Papers 1799, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August. [Downloadable!] (restricted)
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  12. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June. [Downloadable!] (restricted)
  13. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February. [Downloadable!] (restricted)
  14. Frenkel, Jacob A & Razin, Assaf, 1989. "International Effects of Tax Reforms," Economic Journal, Royal Economic Society, vol. 99(395), pages 38-58, Supplemen. [Downloadable!] (restricted)
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  15. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1995. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Aschauer, David Alan & Greenwood, Jeremy, 1985. "Macroeconomic effects of fiscal policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 91-138, January. [Downloadable!] (restricted)
  17. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December. [Downloadable!] (restricted)
  18. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October. [Downloadable!] (restricted)
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  19. Assaf Razin & Efraim Sadka, 1990. "Integration of International Capital Markets: The Size of Government and Tax Coordination," NBER Chapters, in: Taxation in the Global Economy, pages 331-356 National Bureau of Economic Research, Inc. [Downloadable!]
  20. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-23, March.
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  21. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [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. George Zodrow, 2003. "Tax Competition and Tax Coordination in the European Union," Asia-Pacific Financial Markets, Springer, vol. 10(6), pages 651-671, November. [Downloadable!] (restricted)
    Other versions:
  2. Thierry Warin & André Fourçans, 2006. "Tax Competition and Information Sharing in Europe: A Signaling Game," Middlebury College Working Paper Series 0605, Middlebury College, Department of Economics. [Downloadable!]
  3. Faik Koray & K. Peren Arin, . "International Transmission of Fiscal Shocks: An Empirical Investigation," Departmental Working Papers 2006-03, Department of Economics, Louisiana State University. [Downloadable!]
  4. Thierry Warin, . "A Note on the Anglo-Saxon and Continental Approaches to Europe: Identical in Spirit, not in Practice," Middlebury College Working Paper Series 0509r, Middlebury College, Department of Economics. [Downloadable!]
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