Tax Competition, Capital Mobility and Public Good Provision within a Trading Block

28 Pages Posted: 14 Aug 2001

See all articles by Panos Hatzipanayotou

Panos Hatzipanayotou

Athens University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Costas Hadjiyiannis

University of Cyprus - Department of Economics

Michael S. Michael

University of Cyprus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2001

Abstract

We construct a general equilibrium model of a two-country trading block where governments through tax policies attract mobile capital, and provide an imported public consumption good. At Nash equilibrium, when the public good is under-provided, (i) a country with a large GDP, has a large Nash equilibrium income tax rate, (ii) if initially the existing foreign capital in the country is zero or small, then the country with a large population or high individual marginal willingness to pay for the public good has a large Nash equilibrium income tax rate. When the two countries act cooperatively, then for each country, the cooperative optimal income tax rate is positive, and if they are identical then the cooperative income tax rate is greater than the Nash. When the two countries are different, then it is possible that the cooperative income tax rate is less than the Nash.

Keywords: Nash and Cooperative Income Taxes, Capital Mobility, Public Goods

JEL Classification: F21, H21, H41

Suggested Citation

Hatzipanayotou (Xatzipanagiotou), Panagiotis (Panos) and Hadjiyiannis, Costas and Michael, Michael S., Tax Competition, Capital Mobility and Public Good Provision within a Trading Block (July 2001). Available at SSRN: https://ssrn.com/abstract=277370 or http://dx.doi.org/10.2139/ssrn.277370

Panagiotis (Panos) Hatzipanayotou (Xatzipanagiotou)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Costas Hadjiyiannis

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus

Michael S. Michael (Contact Author)

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
357-22892433 (Phone)
357-22892432 (Fax)

HOME PAGE: http://www.econ.ucy.ac.cy/staff/michael.htm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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