Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes

Magnus Hoffmann and Marco Runkel ()

No 3893, CESifo Working Paper Series from CESifo

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 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.

Keywords: tax competition; unit taxes; ad valorem taxes (search for similar items in EconPapers)
JEL-codes: H20 H21 H77 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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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:ces:ceswps:_3893

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