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Ad Valorem Capital Tax Competition

Hikaru Ogawa and Atsushi Yamagishi

No CIRJE-F-1030, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: Studies of tax competition have found that using a unit tax is commitment-robust for governments, while we observe ad valorem taxes on capital in practice. This study presents a model that explains the emergence of ad valorem capital tax competition, incorporating an elastic supply of capital in the standard tax competition model. Specifically, it shows that if the elasticity of capital supply is positive, governments adopt the ad valorem tax method and thereby ad valorem tax competition prevails. On the other hand, under a fixed capital supply (i.e., zero elasticity of capital supply), countries compete in unit taxes.

New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
Date: 2016-11
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Handle: RePEc:tky:fseres:2016cf1030