Tax rates as strategic substitutes

Hendrik Vrijburg () and Ruud de Mooij

International Tax and Public Finance, 2016, vol. 23, issue 1, 2-24

Abstract: This paper analytically derives conditions under which the slope of the tax-reaction function is negative in a classical tax competition model. If countries maximize welfare, a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. The strategic tax response is crucial for understanding tax competition games, as well as the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability. Copyright Springer Science+Business Media New York 2016

Keywords: Strategic substitutes; Asymmetry; Strategic tax response; Tax coordination; E62; F21; H25; H77 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10797-014-9345-9

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