Relaxing Tax Competition through Public Good Differentiation
Working Paper No. 06-W01R
Ben Zissimos and Myrna H. Wooders
ABSTRACT [article]
This paper argues that, because governments are able to relax tax competition through public good differentiation, traditionally
high-tax countries have continued to set taxes at a relatively high rate
even as markets have become more integrated. The key assumption is that
there is variation in the extent to which firms can use public good
provision to reduces costs. We show that, in a setting where tax
competition promotes efficiency, governments are able to use this
variation to relax the forces of tax competition, which reduces
efficiency. In this environment, a `minimum tax' counters the relaxation
of tax competition, thereby enhancing efficiency, and `split the
difference' tax harmonization also enhances efficiency.
Keywords and Phrases: Asymmetric equilibrium, core-periphery, tax competition, tax harmonization.
JEL Classification Numbers: C72, H21, H42, H73, R50