DP3695 Coordination of Capital Taxation Among Asymmetric Countries

Author(s): Susana Peralta , Tanguy van Ypersele

Publication Date: January 2003

Keyword(s): capital mobility , tax competition , Nash equilibrium

JEL(s): F21 , H23 , H30 , H73

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP3695.asp

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.