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Endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax

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  • Nobuo Akai

    ()

  • Hikaru Ogawa

    ()

  • Yoshitomo Ogawa

    ()

Abstract

This paper analyzes an endogenous choice problem with regard to tax instruments in a capital tax competition model. Considering a symmetric and two-region model of tax competition, where each region is allowed to choose either unit or ad valorem tax, we show that selecting unit tax as a policy instrument is the dominant strategy of governments. An interpretation of this result is clearly explained by the properties of the best response curves.
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Suggested Citation

  • Nobuo Akai & Hikaru Ogawa & Yoshitomo Ogawa, 2011. "Endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(5), pages 495-506, October.
  • Handle: RePEc:kap:itaxpf:v:18:y:2011:i:5:p:495-506 DOI: 10.1007/s10797-011-9170-3
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    References listed on IDEAS

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    1. Wildasin, David E., 1991. "Some rudimetary 'duopolity' theory," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 393-421, November.
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    8. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 763-772.
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    10. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, pages 1508-1519.
    11. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, pages 269-304.
    12. Jan K. Brueckner, 2004. "Fiscal Decentralization with Distortionary Taxation: Tiebout vs. Tax Competition," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 133-153.
    13. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, pages 877-892.
    14. Itaya, Jun-ichi & Okamura, Makoto & Yamaguchi, Chikara, 2008. "Are regional asymmetries detrimental to tax coordination in a repeated game setting?," Journal of Public Economics, Elsevier, pages 2403-2411.
    15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    16. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
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    Cited by:

    1. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9435-y is not listed on IDEAS
    2. Magnus Hoffmann & Marco Runkel, 2016. "A welfare comparison of ad valorem and unit tax regimes," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 140-157.
    3. Koethenbuerger, Marko, 2014. "Competition for migrants in a federation: Tax or transfer competition?," Journal of Urban Economics, Elsevier, pages 110-118.
    4. Junichi Haraguchi & Hikaru Ogawa, 2016. "Leadership in Tax Ccompetition with Fiscal Equalization Transfers ," CIRJE F-Series CIRJE-F-1031, CIRJE, Faculty of Economics, University of Tokyo.
    5. Magnus Hoffmann & Marco Runkel, 2016. "A welfare comparison of ad valorem and unit tax regimes," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 140-157.
    6. Aiura, Hiroshi & Ogawa, Hikaru, 2013. "Unit tax versus ad valorem tax: A tax competition model with cross-border shopping," Journal of Public Economics, Elsevier, pages 30-38.
    7. Runkel, Marco & Hoffmann, Magnus, 2012. "Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62079, Verein für Socialpolitik / German Economic Association.
    8. MORITA Tadashi & OGAWA Yoshitomo & ONO Yoshiyasu, 2017. "Corporate Tax Competition in the Presence of Unemployment," Discussion papers 17118, Research Institute of Economy, Trade and Industry (RIETI).
    9. Hiroshi Aiura & Hikaru Ogawa, 2016. "Indirect Taxes in the Cross-border Shopping Model: A Monopolistic Competition Approach," CIRJE F-Series CIRJE-F-1014, CIRJE, Faculty of Economics, University of Tokyo.
    10. Hikaru Ogawa & Hiroshi Aiura, 2012. "Unit Tax versus Ad Valorem Tax: A Tax Competition Model with Cross-border Shopping," ERSA conference papers ersa12p428, European Regional Science Association.
    11. Ogawa, Hikaru, 2016. "When ad valorem tax prevails in international tax competition," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 1-9.

    More about this item

    Keywords

    Tax competition; Unit tax; Ad valorem tax; H20; H21; H77;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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