Competition in Unit vs. Ad Valorem Taxes
This paper shows that in a standard model of tax competition, the Nash equilibrium in capital taxes depends on whether these taxes are unit (as assumed in the literature) or ad valorem (as in reality). In a symmetric version of the model, general results are established: taxes and public good provision are both higher, and residents in all countries are better off, when countries compete in unit taxes, as opposed to ad valorem taxes. However, the difference in equilibrium outcomes is negligible when the number of countries is large.
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