A Simple Two-Country Model of Redistributive Capital Income Taxation

Salvador Lopez, Maurice Marchand () and Pierre Pestieau
Additional contact information
Salvador Lopez: Universidad Autonoma de Barcelona. Departamento de Economia Aplicada
Maurice Marchand: CORE and lAG, Université catholique de Louvain

No 1996025, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper presents a simple two-country model with mobile capital and immobile labour, in which there are two classes of individuals, the workers and the capital owners. A source-based tax on capital income is used to finance transfers to workers. If the two countries are homogeneous in all respects (preferences for equity, population size, and social composition), capital income is shown to be undertaxed at the non-cooperative equilibrium relative to the autarkic situation. In the case of heterogeneous countries, it can be either undertaxed or overtaxed: our simple setting enables us to obtain an easy-to-interpret formula for each country's capital income tax, and numerical examples indicate how the two countries' tax decisions interact at the noncooperative equilibrium. The normative issue of imposing minimal tax standards across countries is also analyzed. The paper provides conditions under which enforcing such policy will be beneficial to all countries.

Date: 1996-05-01
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: A simple two-country model of redistributive capital income taxation (1998)
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