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The International Macroeconomics of Taxation and the Case Against European Tax Harmonization

  • Enrique G. Mendoza

The theory of international macroeconomics shows that domestic tax policy in a global economy affects foreign economic conditions via complex, dynamic interactions through relative prices, tax revenues, and wealth distribution. This paper proposes a tractable quantitative framework for assessing tax policies that is consistent with this theory. The significance of the international transmission channels of tax policy is evaluated in the context of a 'workhorse' two-country dynamic general equilibrium model. The model is used to assess the potential effects of the European harmonization of capital income taxes. The results show that this policy, if enacted along the lines followed in harmonizing value-added taxes, yields large capital outflows and a significant erosion of tax revenue for Continental Europe while the opposite effects benefit the United Kingdom. Welfare in the United Kingdom rises as result, while Continental Europe may incur a substantial welfare cost.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8217.

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Date of creation: Apr 2001
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Publication status: published as Helpman, Elhanan and Efraim Sadka (eds.) Economic Policy in the International Economy: Essays in Honor of Assaf Razin. Cambridge, UK: Cambridge University Press, 2003.
Handle: RePEc:nbr:nberwo:8217
Note: IFM PE
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  1. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
  2. Cooley, T.F. & Hansen, G.D., 1991. "Tax Distortions in a Neoclassical Monetary Economy," RCER Working Papers 265, University of Rochester - Center for Economic Research (RCER).
  3. repec:ner:tilbur:urn:nbn:nl:ui:12-152946 is not listed on IDEAS
  4. Buiter, Willem H., 1984. "Fiscal Policy in Open, Interdependent Economies," CEPR Discussion Papers 28, C.E.P.R. Discussion Papers.
  5. Jacob A. Frenkel & Assaf Razin, 1989. "International Effects of Tax Reforms," NBER Working Papers 2873, National Bureau of Economic Research, Inc.
  6. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  7. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
  8. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  9. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
  10. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
  11. Jacob A. Frenkel & Assaf Razin & Steve Symansky, 1991. "International VAT Harmonization: Economic Effects," NBER Working Papers 3656, National Bureau of Economic Research, Inc.
  12. Jacob A. Frenkel & Assaf Razin, 1986. "The International Transmission and Effects of Fiscal Policies," NBER Working Papers 1799, National Bureau of Economic Research, Inc.
  13. Assaf Razin & Efraim Sadka, 1989. "Integration of the International Capital Markets: The Size of Government and Tax Coordination," NBER Working Papers 2863, National Bureau of Economic Research, Inc.
  14. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
  15. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061430, June.
  16. Elhanan Helpman & Assaf Razin, 1985. "Exchange Rate Management: Intertemporal Tradoffs," NBER Working Papers 1590, National Bureau of Economic Research, Inc.
  17. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
  18. Aschauer, David Alan & Greenwood, Jeremy, 1985. "Macroeconomic effects of fiscal policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 91-138, January.
  19. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  20. Bovenberg, A.L., 1986. "Capital income taxation in growing open economies," Other publications TiSEM d92d32f6-df9f-418b-bbd3-d, School of Economics and Management.
  21. Jeremy Greenwood & Kent P. Kimbrough, 1985. "Capital Controls and Fiscal Policy in the World Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 743-65, November.
  22. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
  23. Assaf Razin & Efraim Sadka, 1990. "Integration of International Capital Markets: The Size of Government and Tax Coordination," NBER Chapters, in: Taxation in the Global Economy, pages 331-356 National Bureau of Economic Research, Inc.
  24. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, vol. 31(1-2), pages 171-181, August.
  25. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December.
  26. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  27. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, May.
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