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Hotelling Tax Competition

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  • Myrna Wooders
  • Ben Zissimos

Abstract

This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling’s Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which is possible, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.

Suggested Citation

  • Myrna Wooders & Ben Zissimos, 2003. "Hotelling Tax Competition," CESifo Working Paper Series 932, CESifo.
    • Handle: RePEc:ces:ceswps:_932
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    References listed on IDEAS

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    Cited by:

    1. Redoano, Michela, 2003. "Fiscal Interactions Among European Countries," Economic Research Papers 269564, University of Warwick - Department of Economics.
    2. Hiroshi Aiura & Yasuo Sanjo, 2010. "Privatization of local public hospitals: effect on budget, medical service quality, and social welfare," International Journal of Health Economics and Management, Springer, vol. 10(3), pages 275-299, September.
    3. Dembour, Carole & Wauthy, Xavier, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 679-687, November.
    4. C. Dembour, 2008. "Competition for Business Location: A Survey," Journal of Industry, Competition and Trade, Springer, vol. 8(2), pages 89-111, June.
    5. Pierre Salmon, 2003. "The assignment of powers in an open-ended European Union," Post-Print hal-00445601, HAL.
    6. John Burbidge & Katherine Cuff & John Leach, 2004. "Capital Tax Competition with Heterogeneous Firms and Agglomeration Effects (new title: Tax competition with heterogeneous firms)," CESifo Working Paper Series 1277, CESifo.

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    Keywords

    hotelling; limit tax; perfect tax discrimination; tax competion;
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