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A Model of Tradeable Capital Tax Permits

Author

Listed:
  • Timothy P. Hubbard

    () (Department of Economics, Colby College)

  • Justin Svec

    () (Department of Economics, College of the Holy Cross)

Abstract

Standard models of horizontal strategic capital tax competition predict that, in a Nash equilibrium, tax rates are inefficiently low due to externalities - capital infl ow to one state corresponds to capital out ow for another state. Researchers often suggest that the federal government impose Pigouvian taxes to correct for these effects and achieve efficiency. We propose an alternative incentive-based regulation: tradeable capital tax permits. Under this system, the federal government would require a state to hold a permit if it wanted to reduce its capital income tax rate from some pre-determined benchmark. These permits would be tradeable across states. We show that, if the federal government sets the correct number of total permits, then social efficiency is achieved. We discuss the advantages of this system relative to the canonical suggestion of Pigouvian taxes.

Suggested Citation

  • Timothy P. Hubbard & Justin Svec, 2012. "A Model of Tradeable Capital Tax Permits," Working Papers 1202, College of the Holy Cross, Department of Economics.
  • Handle: RePEc:hcx:wpaper:1202
    as

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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Do we want to curtail internal tax competition?
      by Economic Logician in Economic Logic on 2012-09-27 19:10:00

    More about this item

    Keywords

    tax competition; marketable permits; asymmetric states;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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