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Efficient Tax Competition with Factor Mobility and Trade: A Note

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  • Giampaolo Arachi

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Abstract

This note shows that residence- and source-based taxes on capital income are not sufficient to sustain an efficient Nash equilibrium when several goods are internationally traded, apart from two special cases. With several traded commodities, domestic fiscal policies affect foreign welfare not only through changes in the world interest rate but also through changes in the equilibrium relative prices of traded commodities. In order to guarantee the existence of an efficient Nash equilibrium in the general case, additional tax instruments are required. In particular, destination-based taxes on traded commodities are needed to enable the government to control the relative commodity prices faced by domestic consumers. In addition, in order to shield domestic producers from changes in world prices, the government must levy either origin-based commodity taxes or taxes on the immobile factors. Copyright Kluwer Academic Publishers 2001

Suggested Citation

  • Giampaolo Arachi, 2001. "Efficient Tax Competition with Factor Mobility and Trade: A Note," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 171-188, March.
  • Handle: RePEc:kap:itaxpf:v:8:y:2001:i:2:p:171-188
    DOI: 10.1023/A:1011272703142
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    File URL: http://hdl.handle.net/10.1023/A:1011272703142
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    References listed on IDEAS

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    1. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
    2. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    3. Clemens Fuest & Bernd Huber, 1999. "Can Tax Coordination Work?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 443-443, July.
    4. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
    5. Mintz, Jack & Tulkens, Henry, 1986. "Commodity tax competition between member states of a federation: equilibrium and efficiency," Journal of Public Economics, Elsevier, vol. 29(2), pages 133-172, March.
    6. Andreas Haufler, 1996. "Optimal factor and commodity taxation in a small open economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(4), pages 523-527, October.
    7. Roger H. Gordon, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 567-586.
    8. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    9. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    10. Patrick J. Kehoe, 1989. "Policy Cooperation Among Benevolent Governments May Be Undesirable," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 289-296.
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    Cited by:

    1. Julian Alworth & Giampaolo Arachi, 2008. "Taxation Policy in EMU - Julian Alworth and Giampaolo Arachi," European Economy - Economic Papers 2008 - 2015 310, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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