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Relaxing Tax Competition through Public Good Differentiation

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  • Ben Zissimos

    ()
    (Department of Economics, Vanderbilt University)

  • Myrna H. Wooders

    ()
    (Department of Economics, Vanderbilt University)

Abstract

This paper argues that, because governments are able to relax tax competition through public good differentiation, traditionally high-tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated. The key assumption is that there is variation in the extent to which firms can use public good provision to reduces costs. We show that, in a setting where tax competition promotes efficiency, governments are able to use this variation to relax the forces of tax competition, which reduces efficiency. In this environment, a `minimum tax' counters the relaxation of tax competition, thereby enhancing efficiency, and `split the difference' tax harmonization also enhances efficiency.

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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0601.

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Date of creation: Jan 2006
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Handle: RePEc:van:wpaper:0601

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Asymmetric equilibrium; core-periphery; tax competition; tax harmonization;

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Citations

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Cited by:
  1. Zissimos, Ben & Wooders, Myrna, 2008. "Public good differentiation and the intensity of tax competition," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1105-1121, June.
  2. Dembour, Carole & Wauthy, Xavier, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 679-687, November.
  3. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.
  4. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR & CES & MSH, vol. 22, pages 385-430, 04.

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