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Capital Tax Competition When Monetary Competition is Present

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  • Onder, Ali Sina

    () (Uppsala Center for Fiscal Studies)

Abstract

In a model that allows for international trade in goods market as well as in money markets, interactions between the capital tax rate and the inflation rate are investigated. It is shown that interactions of capital tax rate and inflation rate create horizontal and vertical externalities. Optimal levels of the capital tax rate and the inflation rate depend on how these externalities dominate one another. If a currency union is formed, the inflation rate that prevails across the currency union will be higher than the inflation rate in either country under monetary independence, and national public good provision will be suboptimally high. Inflation elasticities of the demand for a country’s national currency determine whether capital taxes will be higher or lower under single currency in that country.

Suggested Citation

  • Onder, Ali Sina, 2009. "Capital Tax Competition When Monetary Competition is Present," Working Paper Series, Center for Fiscal Studies 2009:14, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uufswp:2009_014
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    Keywords

    Inflation Tax; Capital Tax Competition; Currency Union;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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