Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes
AbstractThis paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role that corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show (i) that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and (ii) that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner's dilemma since the countries' welfare may be higher if they choose unit taxes. --
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Bibliographic InfoPaper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62079.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Magnus Hoffmann & Marco Runkel, 2012. "Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes," CESifo Working Paper Series 3893, CESifo Group Munich.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-01-12 (Accounting & Auditing)
- NEP-ALL-2013-01-12 (All new papers)
- NEP-PBE-2013-01-12 (Public Economics)
- NEP-PUB-2013-01-12 (Public Finance)
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.:
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THEMA Working Papers
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CESifo Working Paper Series
3946, CESifo Group Munich.
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