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Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes

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  • Runkel, Marco
  • Hoffmann, Magnus

Abstract

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.

Suggested Citation

  • Runkel, Marco & Hoffmann, Magnus, 2012. "Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62079, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc12:62079
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    References listed on IDEAS

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    1. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    2. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "Tax incidence in differentiated product oligopoly," Journal of Public Economics, Elsevier, vol. 81(2), pages 173-192, August.
    3. 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;International Institute of Public Finance, vol. 18(5), pages 495-506, October.
    4. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 269-304, June.
    5. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    6. 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.
    7. 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.
    8. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
    9. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
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    Cited by:

    1. Laszlo Goerke & Frederik Herzberg & Thorsten Upmann, 2014. "Failure of ad valorem and specific tax equivalence under uncertainty," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(4), pages 387-402, December.
    2. repec:kap:enreec:v:68:y:2017:i:3:d:10.1007_s10640-015-9982-1 is not listed on IDEAS
    3. Magnus Hoffmann & Marco Runkel, 2016. "A welfare comparison of ad valorem and unit tax regimes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 140-157, February.
    4. Koethenbuerger, Marko, 2014. "Competition for migrants in a federation: Tax or transfer competition?," Journal of Urban Economics, Elsevier, vol. 80(C), pages 110-118.
    5. Max Franks & Ottmar Edenhofer & Kai Lessmann, 2017. "Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(3), pages 445-472, November.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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