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Endogenizing governments' objectives in tax competition

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  • Pal, Rupayan
  • Sharma, Ajay

Abstract

In this paper we endogenize objective functions of the regions in case the of tax competition for foreign owned mobile capital. First, considering symmetric regions and simultaneous move tax competition, we demonstrate that the competing regions can restrict ‘race-to-the-bottom’ in tax rates by deviating away from social welfare to net tax revenue. Moreover, it is optimal for a region to be fully revenue oriented even if that region's ultimate goal is to maximize social welfare, irrespective of whether the rival region is concerned about social welfare or net tax revenue. Next, we show that these results go through under production asymmetry and under sequential/simultaneous choice of public investment and tax rate in the case of two-dimensional competition. However, in the case of Stackelberg type competition, it is optimal for the leader region not to deviate from its ultimate goal, while the follower region always gains from being fully revenue oriented.

Suggested Citation

  • Pal, Rupayan & Sharma, Ajay, 2013. "Endogenizing governments' objectives in tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 570-578.
  • Handle: RePEc:eee:regeco:v:43:y:2013:i:4:p:570-578
    DOI: 10.1016/j.regsciurbeco.2013.04.004
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:reveco:v:54:y:2018:i:c:p:225-231 is not listed on IDEAS
    2. Florence TOUYA, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers 2015-2016_12, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    3. repec:bla:ecopol:v:29:y:2017:i:3:p:237-251 is not listed on IDEAS
    4. Sharma, Ajay, 2017. "Stackelberg equilibrium in duopoly: strategic use of corporate social responsibility," MPRA Paper 84326, University Library of Munich, Germany.
    5. Florence TOUYA, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers 2015-2016_11, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    6. Keisuke Kawachi & Hikaru Ogawa & Taiki Susa, 2017. "Endogenizing Government's Objectives in Tax Competition with Capital Ownership," CIRJE F-Series CIRJE-F-1054, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    Keywords

    Mobile capital; Tax competition; Revenue orientation; Social welfare; Endogenous objective;

    JEL classification:

    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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