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Dynamic Capital Tax Competition in a Two-country Model

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  • Paul Klein

    (Simon Fraser University)

Abstract

In this paper we explore the implications of tax competition between two jurisdictions in a neoclassical growth model under the assumption of perfect capital mobility. The government of each jurisdiction solves an optimal taxation problem under commitment, treating the other government's policies as given. We provide a new theoretical perspective on a dynamic capital-tax externality that emerges in this model. In numerical experiments, we find that, as a result of this externality, for a range of reasonable parameter values, source-based capital income tax rates are positive in the short run and zero in the long run. We find further that the convergence to zero is much slower than in a closed economy. The latter implies that taxes can be higher with capital mobility than without it, in contrast to a widely held consensus.

Suggested Citation

  • Paul Klein, 2014. "Dynamic Capital Tax Competition in a Two-country Model," 2014 Meeting Papers 496, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:496
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    Cited by:

    1. Habla, Wolfgang, 2016. "The Green Paradox and Interjurisdictional Competition across Space and Time," Working Papers in Economics 668, University of Gothenburg, Department of Economics.
    2. Gross, Till, 2014. "Equilibrium capital taxation in open economies under commitment," European Economic Review, Elsevier, vol. 70(C), pages 75-87.
    3. Arcalean, Calin, 2018. "Dynamic fiscal competition: A political economy theory," Journal of Public Economics, Elsevier, vol. 164(C), pages 211-224.

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