Tax Interactions with Asymmetric Information and Nonlinear Instruments

When same authorities belonging to a same level of government derive their receipts froma mobile tax base, a competition mechanism takes place among them that triggers externalities.Likewise, when di§erent layers of decision-makers exert their taxing power upon a commonbase, the choices made by one tier a§ect the receipts that the other governments can collect.Generally speaking, the decisions made by one government a§ect the tax revenue that can becollected by the decisionmakers belonging to the same tier of government or by stacked jurisdic-tions : externalities arise, the existence and the magnitude of which are closely related to thenature of the tax, to the mobility of the base and to the distribution of tax competence amongdecisionmakers. This paper proposes a model where both horizontal and vertical interactionstake place. Uncertainty concerning the base, that is, the amount of capital likely to be inves-ted, is introduced and a generalization of taxation schemes is provided in order to assess therobustness of traditional analyses results in a more general and realistic scheme. The analysisshows that horizontal and vertical externalities point towards opposite directions : while hori-zontal competition leads to ine¢ ciently low rates, the common pool problem arising from thestacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Thepaper aims at Önding out whether the combination of both externalities yields higher or lowerglobal tax rates than the one that would emerge in a unique government case. It turns that anexcessively high level of taxation emerges. Nevertheless, the vertical tax externality is lessenedwith respect to the vertical competition case : the global tax rate sets at an intermediary level sothat the outcome is brought closer to the social optimum issue.