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Tax rates as strategic substitutes

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  • Hendrik Vrijburg
  • Ruud Mooij

Abstract

This paper analytically derives conditions under which the slope of the tax-reaction function is negative in a classical tax competition model. If countries maximize welfare, a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. The strategic tax response is crucial for understanding tax competition games, as well as the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability. Copyright Springer Science+Business Media New York 2016

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  • Hendrik Vrijburg & Ruud Mooij, 2016. "Tax rates as strategic substitutes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 2-24, February.
    • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:1:p:2-24
    DOI: 10.1007/s10797-014-9345-9
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    Cited by:

    1. Thomas Eichner & Rüdiger Pethig, 2018. "Self-enforcing capital tax coordination," Journal of Business Economics, Springer, vol. 88(7), pages 915-940, September.
    2. Brülhart, Marius & Parchet, Raphaël, 2014. "Alleged tax competition: The mysterious death of bequest taxes in Switzerland," Journal of Public Economics, Elsevier, vol. 111(C), pages 63-78.
    3. Chirinko, Robert S. & Wilson, Daniel J., 2017. "Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?," Journal of Public Economics, Elsevier, vol. 155(C), pages 147-163.
    4. Rupayan Pal & Ajay Sharma, 2019. "Preferences over Public Good, Political Delegation, and Leadership in Tax Competition," Public Finance Review, , vol. 47(4), pages 718-746, July.
    5. Thierry Madiès & Ornella Tarola & Emmanuelle Taugourdeau, 2022. "Tax haven, pollution haven or both?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1527-1560, December.
    6. Michael P. Devereux & Simon Loretz, 2013. "What Do We Know About Corporate Tax Competition?," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 745-774, September.
    7. Raphaël Parchet, 2019. "Are Local Tax Rates Strategic Complements or Strategic Substitutes?," American Economic Journal: Economic Policy, American Economic Association, vol. 11(2), pages 189-224, May.
    8. Kai A. Konrad & Marcel Thum, 2021. "The better route to global tax coordination: Gradualism or multilateralism?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(2), pages 793-811, May.
    9. Franks, Max & Lessmann, Kai, 2023. "Tax competition with asymmetric endowments in fossil resources," Resources Policy, Elsevier, vol. 83(C).
    10. Rota-Graziosi, Grégoire, 2019. "The supermodularity of the tax competition game," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 25-35.
    11. Janeba, Eckhard & Schjelderup, Guttorm, 2023. "The global minimum tax raises more revenues than you think, or much less," Journal of International Economics, Elsevier, vol. 145(C).
    12. Grégoire ROTA-GRAZIOSI, 2016. "Implementing Tax Coordination and Harmonization through Voluntary Commitment," Working Papers P181, FERDI.
    13. Rosella Levaggi & Paolo M. Panteghini, 2021. "Public expenditure spillovers: an explanation for heterogeneous tax reaction functions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 497-514, June.
    14. Bodhisattva Sengupta, 2023. "Regional policy interaction in a federal economy," Indian Economic Review, Springer, vol. 58(1), pages 91-103, June.
    15. Enrico Colombatto, 2015. "An alternative to the Laffer curve: Theory and consequences," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 28(1), pages 75-92, March.
    16. Hebous, Shafik & Keen, Michael, 2023. "Pareto-improving minimum corporate taxation," Journal of Public Economics, Elsevier, vol. 225(C).
    17. Satoshi Kasamatsu & Daiki Kishishita, 2021. "Tax competition and political agency problems," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1782-1810, November.
    18. Miniaci Raffaele & Panteghini Paolo M. & Rivolta Giulia, 2022. "The estimation of reaction functions under tax competition," German Economic Review, De Gruyter, vol. 23(2), pages 301-339, May.
    19. Marie-Laure BREUILLÉ & Emmanuelle TAUGOURDEAU, 2019. "Multi-tier tax competition on Gasoline," Working Papers 2019-23, Center for Research in Economics and Statistics.

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    More about this item

    Keywords

    Strategic substitutes; Asymmetry; Strategic tax response; Tax coordination; E62; F21; H25; H77;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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