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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.

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  • 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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    Cited by:

    1. Ajay Sharma, 2018. "A note on Stackelberg equilibrium in duopoly: Strategic use of corporate social responsibility," Economics Bulletin, AccessEcon, vol. 38(4), pages 1720-1726.
    2. Pal, Rupayan & Sharma, Ajay, 2016. "Competition for Foreign Capital under Asymmetric Revenue-Orientation," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 51(1), pages 105-116.
    3. Hiroshi Aiura & Hikaru Ogawa, 2019. "Indirect taxes in a cross-border shopping model: a monopolistic competition approach," Journal of Economics, Springer, vol. 128(2), pages 147-175, October.
    4. Keisuke Kawachi & Hikaru Ogawa & Taiki Susa, 2019. "Endogenizing government’s objectives in tax competition with capital ownership," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 571-594, June.
    5. Wang, Wenming & Ogawa, Hikaru, 2018. "Objectives of governments in tax competition: Role of capital supply elasticity," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 225-231.
    6. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    7. 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.
    8. Hikaru Ogawa & Taiki Susa, 2017. "Strategic delegation in asymmetric tax competition," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 237-251, November.
    9. Sharma, Ajay, 2017. "Stackelberg equilibrium in duopoly: strategic use of corporate social responsibility," MPRA Paper 84326, University Library of Munich, Germany.
    10. 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.
    11. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.

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    More about this item

    Keywords

    Mobile capital; Tax competition; Revenue orientation; Social welfare; Endogenous objective;
    All these keywords.

    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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