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Reforming an asymmetric union: on the virtues of dual tier capital taxation

  • Andreas Hau fler

    (University of Munich and CESifo)

  • Christoph Lulfesmann

    ()

    (Simon Fraser University and CESifo)

The tax competition for mobile capital, in particular the reluctance of small countries to agree on measures of tax coordination, has ongoing political and economic fallouts within Europe. We analyse the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, federal tax rate in the first stage, and then non-cooperatively set local tax rates in the second stage. We show that this mechanism effectively reduces competition for mobile capital between the members of the union. Moreover, it distributes the gains across the heterogeneous states in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. Finally, we present simulation results, and show that a dual structure of capital taxation has advantages even when side payments are feasible.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1321.

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Date of creation: 2013
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Handle: RePEc:btx:wpaper:1321
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