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A simple two-country model of redistributive capital income taxation

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  • LOPEZ, Salvador
  • MARCHAND, Maurice
  • PESTIEAU, Pierre

Abstract

This paper presents a simple two-country model with mobile capital and immobile labour, in which there are two classes of individuals, the workers and the capital owners. A source-based tax on capital income is used to finance transfers to workers. If the two countries are homogeneous in all respects (preferences for equity, population size, and social composition), capital income is shown to be undertaxed at the non-cooperative equilibrium relative to the autarkic situation. In the case of heterogeneous countries, it can be either undertaxed or overtaxed: our simple setting enables us to obtain an easy-to-interpret formula for each country's capital income tax, and numerical examples indicate how the two countries' tax decisions interact at the noncooperative equilibrium. The normative issue of imposing minimal tax standards across countries is also analyzed. The paper provides conditions under which enforcing such policy will be beneficial to all countries.
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Suggested Citation

  • LOPEZ, Salvador & MARCHAND, Maurice & PESTIEAU, Pierre, 1998. "A simple two-country model of redistributive capital income taxation," CORE Discussion Papers RP 1411, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:1411
    Note: In : Finanzarchiv, 55(4), 445-460, 1998
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    Cited by:

    1. Thierry Warin & André Fourçans, 2006. "Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View," Middlebury College Working Paper Series 0604, Middlebury College, Department of Economics.
    2. Bucovetsky, S. & Marchand, M. & Pestieau, P., 1998. "Tax Competition and Revelation of Preferences for Public Expenditure," Journal of Urban Economics, Elsevier, vol. 44(3), pages 367-390, November.
    3. Pestieau, Pierre, 1996. "Politique sociale, redistribution et intégration économique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(3), pages 275-289, septembre.
    4. Burks, Stephen V. & Carpenter, Jeffrey P. & Götte, Lorenz, 2006. "Performance Pay and the Erosion of Worker Cooperation: Field Experimental Evidence," IZA Discussion Papers 2013, Institute for the Study of Labor (IZA).
    5. Marja Appelman & Joeri Gorter & Mark Lijesen & Richard Venniker & S. Onderstal, 2003. "Equal rules or equal opportunities? Demystifying level playing field," CPB Document 34, CPB Netherlands Bureau for Economic Policy Analysis.
    6. André Fourçans & Thierry Warin, 2001. "Tax Harmonization versus Tax Competition in Europe: A Game Theoretical Approach," Cahiers de recherche CREFE / CREFE Working Papers 132, CREFE, Université du Québec à Montréal.

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