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Dynamic Tax Competition under Asymmetric Productivity of Public Capital

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  • Hiroki Tanaka

    ()

  • Masahiro Hidaka

Abstract

We here expand the static tax competition models in symmetric small regions, which were indicated by Zodrow and Mieszkowski (1986) and Wilson (1986), to a dynamic tax competition model in large regions, taking consideration of the regional asymmetry of productivity of public capital and the existence of capital accumulation. The aim of this paper is to verify how the taxation policy affects asymmetric equilibrium based on a simulation analysis using an overlapping generations model in two regions. It is assumed that the public capital as a public input is formed on the basis of the capital tax of local governments and the lump-sum tax of the central government. As demonstrated in related literature, the optimal capital tax rate should become zero when the lump-sum tax is imposed only on older generations, however, the optimal tax rate may become positive when it is imposed proportionally on younger and older generations. In the asymmetric equilibrium, several cooperative solutions can possibly exist which can achieve a higher welfare standard than the actualized cooperative solution either in Region1 or 2.

Suggested Citation

  • Hiroki Tanaka & Masahiro Hidaka, 2011. "Dynamic Tax Competition under Asymmetric Productivity of Public Capital," ERSA conference papers ersa10p1033, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa10p1033
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    1. Wildasin, David E., 2003. "Fiscal competition in space and time," Journal of Public Economics, Elsevier, vol. 87(11), pages 2571-2588, October.
    2. David F. Burgess, 1988. "Complementarity and the Discount Rate for Public Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 527-541.
    3. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
    4. Yakita, Akira, 1994. "Public investment criterion with distorted capital markets in an overlapping generations economy," Journal of Macroeconomics, Elsevier, vol. 16(4), pages 715-728.
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