Dynamic Tax Competition under Asymmetric Productivity of Public Capital

Hiroki Tanaka and Masahiro Hidaka

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We here expand the static tax competition models in symmetric small regions, which were indicated by Zodrow and Mieszkowski (1986) and Wilson (1986), to a dynamic tax competition model in large regions, taking consideration of the regional asymmetry of productivity of public capital and the existence of capital accumulation. The aim of this paper is to verify how the taxation policy affects asymmetric equilibrium based on a simulation analysis using an overlapping generations model in two regions. It is assumed that the public capital as a public input is formed on the basis of the capital tax of local governments and the lump-sum tax of the central government. As demonstrated in related literature, the optimal capital tax rate should become zero when the lump-sum tax is imposed only on older generations, however, the optimal tax rate may become positive when it is imposed proportionally on younger and older generations. In the asymmetric equilibrium, several cooperative solutions can possibly exist which can achieve a higher welfare standard than the actualized cooperative solution either in Region1 or 2.

Keywords: Tax competition; Capital taxation; Capital accumulation; Public inputs; Infrastructure (search for similar items in EconPapers)
JEL-codes: H21 H42 H71 H77 R13 R53 (search for similar items in EconPapers)
Date: 2009-07-30
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-pbe, nep-pub and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0929

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