Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • Enrique G. Mendoza
  • Linda L. Tesar

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w9746.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9746.

as in new window
Length:
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:nbr:nberwo:9746

Note: IFM PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Frenkel, Jacob & Razin, Assaf & Sadka, Efraim, 1992. "International taxation in an integrated world," MPRA Paper 23266, University Library of Munich, Germany.
  2. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  3. Haufler, Andreas, . "Taxation in a Global Economy," Monographs in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics, number 20387, April.
  4. Rodrik, Dani & van Ypersele, Tanguy, 2001. "Captial mobility, distributive conflict and international tax coordination," Journal of International Economics, Elsevier, Elsevier, vol. 54(1), pages 57-73, June.
  5. Christophe Chamley, 1980. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 553, Cowles Foundation for Research in Economics, Yale University.
  6. Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  7. Wolfgang Eggert, 1999. "International Percussions of Direct Taxes," Finance, EconWPA 9904001, EconWPA.
  8. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, July.
  9. Kanbur, Ravi & Keen, Michael, 1991. "Tax competition and tax coordination : when countries differ in size," Policy Research Working Paper Series 738, The World Bank.
  10. 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.
  11. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, Elsevier, vol. 42(1-2), pages 149-165, February.
  12. Thomas F. Cooley & Gary D. Hansen, 1991. "Tax distortions in a neoclassical monetary economy," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 38, Federal Reserve Bank of Minneapolis.
  13. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. 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, Elsevier, vol. 66(1), pages 99-126, October.
  15. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, Elsevier, vol. 34(2-3), pages 489-504, May.
  16. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report, Federal Reserve Bank of Minneapolis 160, Federal Reserve Bank of Minneapolis.
  17. Chari, V V & Kehoe, Patrick J, 1990. "International Coordination of Fiscal Policy in Limiting Economies," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(3), pages 617-36, June.
  18. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Munich Reprints in Economics, University of Munich, Department of Economics 19402, University of Munich, Department of Economics.
  19. Francesco Daveri & Guido Tabellini, . "Unemployment, Growth and Taxation in Industrial Countries," Working Papers 122, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  20. Assaf Razin & Efraim Sadka, 1989. "Integration of the International Capital Markets: The Size of Government and Tax Coordination," NBER Working Papers 2863, National Bureau of Economic Research, Inc.
  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, Elsevier, vol. 21(2-3), pages 195-232.
  22. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, Elsevier, vol. 35(2), pages 229-240, March.
  23. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers, Institute for Fiscal Studies W94/07, Institute for Fiscal Studies.
  24. repec:sae:niesru:v:149:y::i:1:p:30-52 is not listed on IDEAS
  25. Persson, Torsten & Tabellini, Guido, 1995. "Double-edged incentives: Institutions and policy coordination," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 38, pages 1973-2030 Elsevier.
  26. De Bonis, Valeria, 1997. "Regional integration and factor income taxation," Policy Research Working Paper Series 1849, The World Bank.
  27. Razin, A. & Sadka, E., 1991. "International Fiscal Policy Coordination and Competition," Papers, Tel Aviv - the Sackler Institute of Economic Studies 3-91, Tel Aviv - the Sackler Institute of Economic Studies.
  28. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 297-323, December.
  29. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 877-92, September.
  30. Huber, Bernd, 1999. "Tax competition and tax coordination in an optimum income tax model," Journal of Public Economics, Elsevier, Elsevier, vol. 71(3), pages 441-458, March.
  31. Lopez-Garcia, Miguel-Angel, 1998. "On welfare and revenue effects of indirect tax harmonization," Economics Letters, Elsevier, Elsevier, vol. 60(2), pages 185-193, August.
  32. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  33. Frey, Bruno S. & Eichenberger, Reiner, 1996. "To harmonize or to compete? That's not the question," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 335-349, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Eduardo Haddad & Alexandre A. Porsse & Eduardo P. Ribeiro, 2006. "Modeling Interjurisdictional Tax Competition in a Federal System," ERSA conference papers ersa06p359, European Regional Science Association.
  2. Günther Rehme, 2007. "Economic Growth and (Re-)Distributive Policies in a Non-cooperative World," Journal of Economics, Springer, Springer, vol. 91(1), pages 1-40, May.
  3. Coenen, Günter & McAdam, Peter & Straub, Roland, 2007. "Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model," Working Paper Series, European Central Bank 0747, European Central Bank.
  4. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "Do tax havens divert economic activity?," Economics Letters, Elsevier, Elsevier, vol. 90(2), pages 219-224, February.
  5. Eva de Francisco, 2005. "Limited Participation, Income Distribution and Capital Account Liberalization," Computing in Economics and Finance 2005, Society for Computational Economics 454, Society for Computational Economics.
  6. Eva de Francisco, 2005. "Limited Participation, Income Distribution and Capital-Account Liberalization: Working Paper 2005-02," Working Papers, Congressional Budget Office 16302, Congressional Budget Office.
  7. 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), Université de Lausanne, Faculté des HEC, DEEP 08.01, Université de Lausanne, Faculté des HEC, DEEP.
  8. Enrique G. Mendoza & Linda L. Tesar, 2003. "Winners and Losers of Tax Competition in the European Union," NBER Working Papers 10051, National Bureau of Economic Research, Inc.
  9. Dimitris Papageorgiou, 2009. "Macroeconomic Implications of Alternative Tax Regimes: The Case of Greece," Working Papers, Bank of Greece 97, Bank of Greece.
  10. Huizinga, Harry & Nielsen, Søren Bo, 2004. "Must losing taxes on saving be harmful?," Working Papers, Copenhagen Business School, Department of Economics 15-2004, Copenhagen Business School, Department of Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9746. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.