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Why Do Most Countries Set Higher Tax Rates on Capital?

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Author Info

  • Nicolas Marceau

    ()
    (Universite du Quebec a Montreal)

  • Steeve Mongrain

    ()
    (Simon Fraser University)

  • John D. Wilson

    ()
    (Michigan State University)

Abstract

We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are then left to set revenue maximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.

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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-09.

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Length: 38
Date of creation: May 2007
Date of revision:
Handle: RePEc:sfu:sfudps:dp07-09

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Keywords: Tax Competition; Capital Mobility;

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References

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