Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes

Marco Runkel () and Magnus Hoffmann

VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century from Verein für Socialpolitik / German Economic Association

Abstract: This paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role that corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show (i) that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and (ii) that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner's dilemma since the countries' welfare may be higher if they choose unit taxes.

JEL-codes: H21 H25 H77 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc12:62079

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