Tax Rates as Strategic Substitutes

Ruud de Mooij and Hendrik Vrijburg ()

No 12-104/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a publication in 'International Tax and Public Finance' .

This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing 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.

Keywords: Strategic Substitutes; Asymmetry; Strategic Tax Response; Tax Coordination (search for similar items in EconPapers)
JEL-codes: E62 F21 H25 H77 (search for similar items in EconPapers)
Date: 2012-10-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Journal Article: Tax rates as strategic substitutes (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120104

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