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Public Good Differentiation and the Intensity of Tax Competition

  • Ben Zissimos

    ()

    (Department of Economics, Vanderbilt University)

  • Myrna Wooders

    ()

    (Department of Economics, Vanderbilt University)

We show that, in a setting where tax competition promotes efficiency, variation in the extent to which firms can use public goods to reduce costs brings about a reduction in the intensity of tax competition. This in turn brings about a loss of efficiency. In this environment, a `minimum tax' counters the reduction in the intensity of tax competition, thereby enhancing efficiency. `Split-the-difference' tax harmonization also potentially enhances efficiency but would not be agreed upon by governments because it lowers the payoff to at least one of them. This paper also presents an explanation for how traditionally high-tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated.

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File Function: Revised version, 2007
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0710.

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Date of creation: Nov 2003
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Handle: RePEc:van:wpaper:0710
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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