Kant–Nash tax competition

In a two-country economy, we analyze how tax competition differs from the standard all-Nashian tax competition, if one or both countries are Kantians in Roemer’s sense. Kantians are shown to choose a higher tax rate than Nashians for any given tax rate of the other country, which indicates that they seek to mitigate the (Nashian) race to the bottom. In case of symmetric countries, the all-Kantian tax competition turns out to be efficient and the inefficient race to the bottom is weakened in economies with a Nashian and a Kantian. That confirms the intuitive idea that countries following the Kantian categorical imperative avoid or at least soften the socially undesirable impact of (Nashian) self-interest. We also investigate the incentives of opportunistic countries to choose Nashian or Kantian behavior out of self-interest and find that either both governments choose to behave as Kantians or that—under different conditions—the robust Nashian self-interest supersedes Kantian moral principles such that the inefficient all-Nashian tax competition results.