Browsing by Subject "tax competition"

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  • Kurusiov, Andrej (2008)
    This theoretical work is largely based on two papers on international tax harmonization, environmental taxation and tax competition. In particular, the papers "Agglomeration, integration and tax harmonisation" (Baldwin, R. E., Krugman, P., 2004) and "Environmental taxation, tax competition, and harmonization" (Cremer, H., Gahvari, F., 2004) are used to support each other and to follow the logic of the thesis. The structure of present work is based on analysis of the above mentioned literature, thus, dividing it into major parts: the first part is devoted to issues of integration and tax harmonization and the second part extends the discussion to the issues of environmental taxation. The first part explores the issue of whether closer economic integration necessitates harmonization of tax rates among the countries. In this part I analyze the impact of tax harmonization policies, economies agglomeration as well as goods and market integration on international tax competition. The basic tax competition model is used in exploring the effects of agglomeration forces. Further, in this paper I demonstrate that greater economic integration triggers the raise of taxes (referred as 'race to the top'). In addition, 'split the difference' tax harmonization, which basically means agreeing on a tax level that is in between two positions can make both countries worse off, because without it one region can actually set a higher tax rate without having the capital depreciation and thus not to loose a potential tax revenue. This explains why tax harmonization is very rare in the real world. Consequently, the general conclusion is that agglomeration assumptions produce reverse propositions compared to standard tax competition literature. More specifically, the explanation of rare practical implementation of tax harmonization is also that an industrial concentration creates so-called 'agglomeration rent'. The 'core' region can this way set a higher tax rate without having the capital depreciation. Thus, the first part on my thesis analyzes and demonstrates the impact of agglomeration forces on tax harmonization. Second major part of the thesis addresses tax competition problem in the context of transboundary pollution. In particular, I analyze how effective are the policies of partial fiscal coordination. Economic integration is forcing companies to adopt the same or less polluting technologies. This unfortunately results in an increase of aggregate emissions and a decline of welfare. Without proper (partial) tax harmonization policies there is an obvious negative aspect of an economic integration. Additionally, in the second part I examine partial tax harmonization policies. With a higher tax, companies choose less polluting technologies, resulting in a decrease of aggregate emissions and the improvement of welfare. Alternatively, if an emission tax is decreased, companies tend to choose more polluting (cheaper) technologies and aggregate emissions will consequently increase and welfare will deteriorate. Finally, harmonization of emission taxes above their Nash equilibrium values causes aggregate emissions to decline and overall welfare to increase. In the present work I address the issues of international tax competition from different perspectives. Thus, as a result of extensive analysis of various factors influencing international tax competition and environmental protection my main conclusion is that a closer economic integration can positively influence the environment and overall welfare.
  • Solanko, Laura (2001)
    The paper analyses effects of fiscal competition for mobile capital between identical regions in a transition economy. I add two features characteristic of transition economies into the familiar model of fiscal competition by Keen-Marchand (1997). Firstly, the economy is seen to consist of two sectors with differing productivities. Even though both sectors use same inputs, the new sector is more productive than the old one. Secondly, decision-makers are assumed to be only partially benevolent. They maximise a weighted average of consumer's utility and their private benefit that originates in the old sector production. The primary interest centers on the effects of fiscal competition on the overall level and on the composition of public goods provision when the economy is characterised by the above-mentioned transition features. Two specifications for decision-maker's private benefit will be used. The basic case corresponds closely to that in Keen-Marchand (1997) producing results largely in line with theirs. The level of public goods provision is proved to be too low in a competitive equilibrium. Additionally, the composition of public goods will be distorted towards too much infrastructure and too little social public good. A common increase in capital tax rates or a common change in the composition of public goods would unambigously increase consumer's welfare, but the welfare change is proven to be smaller than it would be in pure Keen-Marchand (1997) model. The alternative specification of decision-maker's private benefit may be seen as a special case of the one used in Qian-Roland (1998). As it is assumed that politicans own state sector rents, the results change radically. It is no longer self-evident that too little public goods is provided in a competitive equilibrium and a common policy change may, in fact, be welfare-deterioring for the consumers. Specifically, when the relative share of old sector production in a region is large, a common increase in tax on mobile capital may decrease consumer's welfare. The opposite is proven to hold if the production structure of the transition economy (i.e. the relative share of old sector production) is very close to a standard one-sector economy.
  • Erholm, Juha (2006)
    The European Union has taken down internal borders in Europe to allow for the free movement of people, companies, goods and services. Yet EU member states retain great liberty in setting their own tax levels and public systems. As mobility causes public economies to take the external situation into consideration when setting tax and public expenditure policies, this new setting can encourage fiscal competition between EU member states and lower income redistribution levels in the EU. This thesis examines this setting from the perspective of how labour mobility can cause fiscal competition. In recent decades, labour mobility in Europe has been quite low. This can be expected to change, however, partly because of the May 2004 enlargement of the EU. Wildasin (1991) models a combined federal and local system with federal subsidies and local income redistribution, with only the poor being allowed to move. In equilibrium local jurisdictions end up with the same income redistribution as all other local jurisdictions. Hindriks (1999) examines a setting where independent jurisdictions compete fiscally, attracting the rich and deterring the poor. Particularly the mobility of the rich is detrimental to income redistribution. Also the mobility of the poor has in most cases a negative effect. Jurisdictions can compete either in taxes, transfers or both in taxes and transfers, with competition in transfers having the strongest effect on income redistribution. Tax and income redistribution reasons are not currently the biggest cause to migrate in the EU. Despite this, expecting labour mobility levels to go up European nations will have to consider labour mobility induced fiscal competition as possibly limiting public policy in the future.
  • Gangnuss, Danila (2005)
    The European Union has created a massive market for goods, services, capital and labour. In principle, goods and services as well as factors of production can move freely across the national borders within the European Union. Migration of the factors of production is driven by the country-specific differences in marginal productivity. As a result of this, migration ensures the most efficient use of the factors of production and therefore promotes the general welfare. However, international mobility of the factors of production might threaten national welfare of the countries that participate in economic integration. For some of the countries, this raises concerns about loosing factors of production in favor of the other member-states of the European Union. The purpose of this thesis is to analyze how mobility of skilled labour affects income taxation decisions in the countries that face economic integration. The thesis identifies optimal patterns of taxes and of public expenditures in the countries that face international agglomeration of industry. It poses the question of whether there exists an optimal size of the public sector in the presence of economic integration. Starting with the core-periphery models of Krugman (1991a), Fujita et al. (1999) and Forslid (1999), the thesis considers a new economic geography model of tax competition (Andersson and Forslid 2001), where two initially identical countries compete for internationally mobile skilled workers. The model contains two types of equilibria. In the dispersed equilibrium, manufactured production and skilled workers are located in both countries. In the agglomerated equilibrium, manufactured production and skilled workers are concentrated in one of the countries. For both types of equilibrium we construct taxes, which are optimal for the purpose of preserving current distribution of manufactured production and of skilled workers. We show that it is always optimal to tax the income of skilled workers at some positive rate. In the dispersed equilibrium, taxes on the income of skilled workers cannot be increased above some critical level without producing agglomeration of industry. However, in the agglomerated equilibrium, economic integration decreases sensitivity of skilled workers with respect to fiscal incentives. As a result of this, the scope for income taxation of skilled workers in the agglomerated equilibrium does not monotonically decline with trade costs. We also show that taxes on the income of unskilled workers determine the size of the public sector in the dispersed equilibrium but not in the agglomerated equilibrium. It is interesting that in the country, which contains agglomeration of industry, taxes on the income of unskilled workers can be decreased without reducing the size of the public sector.