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Efficient Tax Competition with Factor Mobility and Trade: A Note

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  • Giampaolo Arachi

Abstract

This note shows that residence- and source-based taxes on capital income are not sufficient to sustain an efficient Nash equilibrium when several goods are internationally traded, apart from two special cases. With several traded commodities, domestic fiscal policies affect foreign welfare not only through changes in the world interest rate but also through changes in the equilibrium relative prices of traded commodities. In order to guarantee the existence of an efficient Nash equilibrium in the general case, additional tax instruments are required. In particular, destination-based taxes on traded commodities are needed to enable the government to control the relative commodity prices faced by domestic consumers. In addition, in order to shield domestic producers from changes in world prices, the government must levy either origin-based commodity taxes or taxes on the immobile factors. Copyright Kluwer Academic Publishers 2001

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  • Giampaolo Arachi, 2001. "Efficient Tax Competition with Factor Mobility and Trade: A Note," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 171-188, March.
    • Handle: RePEc:kap:itaxpf:v:8:y:2001:i:2:p:171-188
    DOI: 10.1023/A:1011272703142
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    References listed on IDEAS

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    Cited by:

    1. Julian Alworth & Giampaolo Arachi, 2008. "Taxation Policy in EMU - Julian Alworth and Giampaolo Arachi," European Economy - Economic Papers 2008 - 2015 310, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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