Working Paper: CEPR ID: DP3695
Authors: Susana Peralta; Tanguy Van Ypersele
Abstract: This Paper tackles the issue of international fiscal coordination in a world where markets are integrated but national governments are sovereign. The consequences of capital market liberalization to national fiscal policies and possible remedies to resulting inefficiencies are analysed. A simple, perfectly competitive, N-country model where capital is mobile and labour immobile is considered. Fiscal competition arises between governments that have to tax capital and labor in order to finance a publicly provided private good. Asymmetric capital taxation arises at equilibrium leading to a distortion on the international capital market.Two fiscal reforms are considered: the introduction of a minimum capital tax level and the imposition of a tax range, i.e., a minimum plus a maximum capital tax level.We show that the minimum tax reform is never preferred to fiscal competition by all countries while the tax range reform is unanimously accepted when it does not change the international remuneration of capital.
Keywords: Capital Mobility; Nash Equilibrium; Tax Competition
JEL Codes: F21; H23; H30; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital tax competition (H73) | inefficient allocation of resources (D61) |
| varying tax rates (H25) | distortions in capital flows (F32) |
| non-cooperative behavior (C72) | differing tax levels (H29) |
| differing tax levels (H29) | Nash equilibrium that does not maximize welfare (D69) |
| minimum capital tax (F38) | no Pareto improvement (D69) |
| tax range reform (H26) | Pareto improvement (D61) |
| tax range reform (H26) | convergence in marginal productivity of capital (O47) |
| convergence in marginal productivity of capital (O47) | enhanced welfare for all parties involved (I30) |
| equilibrium taxes adjustment (H29) | enhanced efficiency in capital allocation (G31) |