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Relaxing Tax Competition through Public Good Differentation

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  • Zissimos, Ben

    (Dept of Economics, Vanderbilt University)

  • Wooders, Myrna

    (Dept 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 firms vary in the extent to which public good provision reduces costs. We show that Leviathan governments are able to use this fact to relax the forces of tax competition, reducing efficiency. When firms can ‘vote with their feet’ tax competition leads firms to locate in ‘too many’ jurisdictions. A ‘minimum tax’ further relaxes tax competition, further reducing efficiency.

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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 737.

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Length: 45 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wrk:warwec:737

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Keywords: asymmetric equilibrium ; core-periphery ; non-renegotiable minimum tax ; tax competition ; tax harmonization;

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References

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Cited by:
  1. Agnès Bénassy-Quéré & Nicolas Gobalraja & Alain Trannoy, 2007. "Tax and public input competition," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 22, pages 385-430, 04.
  2. Zissimos, Ben & Wooders, Myrna, 2008. "Public good differentiation and the intensity of tax competition," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1105-1121, June.
  3. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, Springer, vol. 8(2), pages 89-111, June.
  4. DEMBOUR, Carole & WAUTHY, Xavier, . "Investment in public infrastructure with spillovers and tax competition between contiguous regions," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2161, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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