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Tax Competition and Tax Coordination in an Optimum Income Tax Model


  • Bernd Huber


The paper uses the self-selection approach of Stiglitz (1982) to study tax competition and tax coordination in a many country-optimum income tax model. In the model, the government can impose a non-linear tax schedule on wage income and a (source-based) tax on mobile capital. In an uncoordinated equilibrium, it turns out that countries can use the capital tax instrument to weaken the self-selection constraint. The paper presents examples where positive and negative capital taxes are optimal from a single country perspective. For the case of CES production functions, the paper shows that the optimal capital tax is zero. - The paper also shows that, contrary to the standard tax competition model, the uncoordinated equilibrium can be efficient. If the wealth distribution (the endowments with capital among individuals), is egalitarian, a coordination of capital taxes does not affect welfare. For non-egalitarian wealth distributions, a coordinated increase in capital taxes can raise or lower welfare depending on the redistributive impact of a higher capital tax.

Suggested Citation

  • Bernd Huber, "undated". "Tax Competition and Tax Coordination in an Optimum Income Tax Model," EPRU Working Paper Series 97-25, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:97-25

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    References listed on IDEAS

    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Canzoneri, Matthew B. & Diba, Behzad T., 1991. "Fiscal deficits, financial integration, and a central bank for Europe," Journal of the Japanese and International Economies, Elsevier, vol. 5(4), pages 381-403, December.
    3. Randall W. Eberts & Joe A. Stone, 1992. "Wage and Employment Adjustment in Local Labor Markets," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wea, November.
    4. von Hagen, Jurgen & Hammond, George W, 1998. "Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 331-353, June.
    5. Jacques Mélitz, 1995. "A suggested reformulation of the theory of optimal currency areas," Open Economies Review, Springer, vol. 6(3), pages 281-298, July.
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