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A Model of Tradeable Capital Tax Permits

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  • TIMOTHY P. HUBBARD
  • JUSTIN SVEC

Abstract

Standard models of horizontal capital tax competition predict that, in a Nash equilibrium, states set tax rates inefficiently due to externalities—capital inflow to one state corresponds to capital outflow for another state. Researchers often suggest that the federal government impose Pigouvian taxes to correct for these effects and achieve efficiency. We propose an alternative incentive-based regulation: tradeable capital tax permits. Under this system, the federal government would require a state to hold a permit if it wanted to reduce its capital income tax rate from some predefined benchmark. These permits would be tradeable across states. We show that, if the federal government sets the correct number of total permits, then social efficiency is achieved. We discuss the advantages of this system relative to the canonical suggestion of Pigouvian taxes.

Suggested Citation

  • Timothy P. Hubbard & Justin Svec, 2015. "A Model of Tradeable Capital Tax Permits," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(6), pages 916-942, December.
    • Handle: RePEc:bla:jpbect:v:17:y:2015:i:6:p:916-942
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    1. Do we want to curtail internal tax competition?
      by Economic Logician in Economic Logic on 2012-09-27 19:10:00

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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