An index of capital tax competition

Abstract

Tax competition, Tax harmonization, Index, H73, H87, F59,

Mergers in fiscal federalism

“…To simplify the analysis, we assume that v" 3 . The marginal utility derived from the local public good g ij is proportional to the one derived from the regional public good G i , that is, v0 = V 0 , where is a strictly positive parameter.…”

“…In addition to the analysis of the impact of the merger of top-tier jurisdictions in this framework, our work bridges a gap in the understanding of the di¤erence between mergers (Hoyt, 1991, Bucovetsky, 2008, Keen and Kotsogiannis, 2004) and coalitions of jurisdictions (Burbidge et al, 1997, Konrad andSchjelderup, 1999). A parallelism can also be made with the industrial organization literature on mergers of …rms, for which a great deal has been produced (e.g., Salant et al, 1983, Spengler, 1950, Gaudet and Van Long, 1996, Ordover et al, 1990 for some seminal papers).…”

“…Decreasing the number of jurisdictions reduces the capital movement; thus, increasing its tax rate is less harmful for a jurisdiction. Considering the possibility of asymmetric mergers, Bucovetsky (2008) also concluded that any merger leads to a higher average tax rate for the federation as a whole due to higher tax rates in jurisdictions that do not belong to the merger.…”

Tax rates as strategic substitutes

“…Others rely on a linear utility function in which public goods are valued more than private goods (see a.o. Devereux, Lockwood andRedoano, 2008, andBucovetsky, 2009). Both assumptions rule out a negatively sloped tax reaction function a priori.…”

“…Wildasin (1988), Bucovetsky (1991) and Wilson (1991) explore tax competition in which countries can influence world market prices. While this introduces an interesting strategic tax element, none of them explores the slope of the tax reaction function (see also Brueckner, 2003).…”