Capital Tax Competition When Monetary Competition is Present

Ali Onder

No 2009:14, Working Paper Series, Center for Fiscal Studies from Uppsala University, Department of Economics

Abstract: In a model that allows for international trade in goods market as well as in money markets, interactions between the capital tax rate and the inflation rate are investigated. It is shown that interactions of capital tax rate and inflation rate create horizontal and vertical externalities. Optimal levels of the capital tax rate and the inflation rate depend on how these externalities dominate one another. If a currency union is formed, the inflation rate that prevails across the currency union will be higher than the inflation rate in either country under monetary independence, and national public good provision will be suboptimally high. Inflation elasticities of the demand for a country’s national currency determine whether capital taxes will be higher or lower under single currency in that country.

Keywords: Inflation Tax; Capital Tax Competition; Currency Union (search for similar items in EconPapers)
JEL-codes: F15 F33 H21 H77 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-09-22
New Economics Papers: this item is included in nep-acc
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