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Capital Income Tax Coordination and the Income Tax Mix

Author

Listed:
  • Huizinga, Harry

    (Department of Economics, Copenhagen Business School)

  • Nielsen, Søren Bo

    (Department of Economics, Copenhagen Business School)

Abstract

Europe has seen several proposals for tax coordination only in the area of capital income taxation, leaving countries free to adjust their labor taxes. The expectation is that higher capital income tax revenues would cause countries to reduce their labor taxes. This paper shows that such changes in the mix of capital and labor taxes brought on by capital income tax coordination can potentially be welfare reducing. This reflects that in a non-cooperative equilibrium capital income taxes may be more distorting from an international perspective than are labor income taxes. Simulations with a simple model calibrated to EU public finance data suggest that countries indeed lower their labor taxes in response to higher coordinated capital income taxes. The overall welfare effects of capital income tax coordination, however, are estimated to remain positive.

Suggested Citation

  • Huizinga, Harry & Nielsen, Søren Bo, 2005. "Capital Income Tax Coordination and the Income Tax Mix," Working Papers 24-2005, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2005_024
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7582
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    References listed on IDEAS

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    1. Clemens Fuest & Bernd Huber, 1999. "Can Tax Coordination Work?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 443-443, July.
    2. Gatsios, Konstantine & Karp, Larry, 1992. "The Welfare Effects of Imperfect Harmonisation of Trade and Industrial Policy," Economic Journal, Royal Economic Society, vol. 102(410), pages 107-116, January.
    3. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
    4. van der Ploeg, Frederick, 1988. "International policy coordination in interdependent monetary economies," Journal of International Economics, Elsevier, vol. 25(1-2), pages 1-23, August.
    5. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
    6. Mendoza, Enrique G. & Tesar, Linda L., 2005. "Why hasn't tax competition triggered a race to the bottom? Some quantitative lessons from the EU," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 163-204, January.
    7. 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.
    8. Klein Paul & Quadrini Vincenzo & Rios-Rull Jose-Victor, 2005. "Optimal Time-Consistent Taxation with International Mobility Of Capital," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-36, June.
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    Keywords

    None;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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