Globalisation of the Economy and the Nation State

A theoretical model describes the local choice of the tax rate on capital income. It establishes preferences and various fiscal conditions - including the tax rates of competing jurisdictions - as determinants of the tax rate. The empirical implications are tested using a large panel of jurisdictions in Germany, which have discretion in setting the local rate of the business tax. Tax competition is identified by means of instrumental variables techniques. Despite significant competition effects between local neighbors, where tax rates are strategic complements, jurisdictions are found to have some leeway in using the tax rate as an instrument of their policy. In particular, large jurisdictions set higher tax rates in interjurisdictional competition.

Local Business Taxation and Competition for Capital: The Choice of the Tax Rate

This paper uses a game-tlieoredc approach to analyse the taxadon of interest income in Europe in the presence of tax evasion. The model allows tis to assess the success of various reform proposals. We argue tbat the tax treatment of nonresidents' interest income plays a crucial role. When decisions on discriminatio n and on withholding tax rates are made noncooperadvely, the outcome is similar to a prisoners' dilemma. All countries discriminate, but in equilihrium internationally mobile portfolio capital evades taxation successfully. In contrast, if all governments did not discriminate, tax competition leads to less tax evasion. The integration of capital markets in Europe has hrought various benefits. At the same time, however, governments struggle to contain tax evasion. International capital flight as an attempt to evade taxes is particularly relevant in the area of taxation of interest income. Banking secrecy laws in some EU countries and low tax rates in small countries like Luxembourg, which hoost its role as financial centre, have led to the effective elimination ofthe taxation of interest income for some investors. The Economist speaks, not surprisingly, about 'The Disappearing Taxpayer' (May 31, 1997). Several proposals have been made in order to overcome this situation.' The European Commission supports the introduction of a minimum tax rate and/ or the status of a community resident. Under the concept of a community resident a country's tax on interest income is independent of the residence of the investor (practically realising the source principle). By contrast, a proposal of the OECD (1977) argues in favour of a maximum withholding tax rate on interest income. None of these proposals has been unanimously accepted since gains and losses from non-coordinated policies differ greatly across member states. The main beneficiary of the present situation is Luxembourg which attracts large amounts of foreign capital, in particular from Germany. The United Kingdom opposes any coordination for political reasons and because tax coordination may also threaten London's role as the leading financial centre in Europe. In contrast, Germany sticks to its traditional bank secrecy law which enables resident investors to evade German taxation by investing abroad.

Tax Evasion, Tax Competition and the Gains From Nondiscrimination: the Case of Interest Taxation in Europe

This article analyzes the conditions under which the smaller of two otherwise identical countries prefers the noncooperative Nash equilibrium to a situation of fully harmonized tax rates. A standard two-country model of capital tax competition is extended by allowing for transaction costs, additional countries, and additional tax instruments. The effects of introducing either mobility costs or a wage tax instrument are theoretically ambiguous because they lower both the costs and the benefits of noncooperation from the perspective of the small country. Numerical simulations indicate, however, that for a wide range of parameter values, all model extensions considered reduce the possibility that the small country gains from tax competition.

/pdf/when-do-small-countries-win-tax-wars-2qjn68lx4m.pdf

When Do Small Countries Win Tax Wars

This paper discusses how local tax rates of a capital tax are set when communities compete for capital as a mobile factor. In a theoretical model communities provide public inputs nanced by a tax on capital income in order to maximize their objective function. It is shown that communities will respond to each others taxing decisions irrespective of the actual weights in the objective functions. However, in the tax equilibrium di erences in tax rates are not eliminated if communities di er in size or in the councils' preferences. These propositions are then related to the empirical distribution and development of the collection rates of the business tax in West Germany's districts. The results indicate that collection rates are set in response to the scal decisions of local neighbors. Yet, competition does not eliminate all tax di erences between locations. In particular, tax rates are positively related to communities' population size even when controlling for density. This conforms with the hypotheses that large jurisdictions are less concerned with a tax policy aimed at attracting mobile capital. In addition federally mandated local welfare expenses are established as a determinant of local tax di erences raising concerns about distortions induced by the German federal system.

https://www.econstor.eu/bitstream/10419/114283/1/ERSA1999_a180.pdf

Local Capital Income Taxation and Competition for Capital: The Choice of the Tax Rate

This paper reviews critically the equilibrium concepts used in the tax competition literature and shows that in a wide class of existing models equilibria occur only under very restrictive and obviously unrealistic assumptions. Crucial are the assumptions of arbitrary divisibility and equal international mobility of all (types of) capital. However, new investment is quite mobile internationally and reacts to tax differentials whereas installed capital is hardly relocated. We incorporate this observation and show in a Bertrand model of tax competition with immobile, but elastic domestic tax bases and an internationally mobile tax base that no competitive equilibrium exists.

Equilibria in Tax Competition Models

We show that in Bertrand models pure-strategy equilibria exist only under extraordinarily restrictive assumptions. We analyze tax competition between two countries for foreign investment. In the symmetric case of equal gross profits of the firms, zero-taxation is the unique equilibrium in pure strategies. If gross profits differ between countries only ∈-equilibria can exist. However, if the tax rate applies to foreign investment as well as to domestic sources no equilibria exist in pure strategies. The same holds true if countries compete for firms that differ in gross profit opportunities, unless extremely unrealistic conditions are met.

Karl-Josef Koch

Papers

Equilibria in Tax Competition Models

Tax Competition in a Bertrand Model

Mean demand when consumers satisfy the weak axiom of revealed preference