Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes
This paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role that corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show (i) that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and (ii) that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner's dilemma since the countries' welfare may be higher if they choose unit taxes.
|Date of creation:||2012|
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- Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "Tax Incidence in Differentiated Product Oligopoly," Virginia Economics Online Papers 341, University of Virginia, Department of Economics.
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- Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
- D. B. Suits & R. A. Musgrave, 1953. "Ad Valorem and Unit Taxes Compared," The Quarterly Journal of Economics, Oxford University Press, vol. 67(4), pages 598-604.
- Nobuo Akai & Hikaru Ogawa & Yoshitomo Ogawa, 2011.
"Endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax,"
International Tax and Public Finance,
Springer, vol. 18(5), pages 495-506, October.
- Nobuo Akai & Hikaru Ogawa & Yoshitomo Ogawa, 2010. "Endogenous Choice on Tax Instruments in a Tax Competition Model: Unit Tax versus Ad Valorem Tax," Discussion Papers in Economics and Business 10-01, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
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