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Is a Dynamic Approach to Tax Games Relevant?

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  • Nora Paulus
  • Patrice Pieretti
  • Benteng Zou

Abstract

In this paper, we argue that static models provide an incomplete analysis of interjurisdictional tax competition. Accordingly, one can doubt whether a one-shot view is suitable for analyzing real-world tax competition. Contrary to previous contributions in tax competition, we are able to model the interplay between changing tax rates and sluggish factor adjustments. We demonstrate that the intensity of tax competition is impacted by the temporal nature of the game. The commitment of governments to stick to their tax policies for a given period (open-loop behavior) leads to less intense competition relative to a static approach. If the policymakers continuously update their tax rates (Markovian behavior), competition is fiercer than in a static game, except for the case where capital adjustment is relatively sluggish and the governments' marginal valuation of public goods is high enough.

Suggested Citation

  • Nora Paulus & Patrice Pieretti & Benteng Zou, 2021. "Is a Dynamic Approach to Tax Games Relevant?," Annals of Economics and Statistics, GENES, issue 144, pages 113-138.
  • Handle: RePEc:adr:anecst:y:2021:i:144:p:113-138
    DOI: https://doi.org/10.15609/annaeconstat2009.144.0113
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    References listed on IDEAS

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    More about this item

    Keywords

    Differential Game; Dynamic Tax Competition; Markovian Nash Equilibrium; Open-Loop Strategy;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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