Some Equity and Efficiency Considerations of International Tax Competition

Posted: 21 May 2003

See all articles by Werner Roeger

Werner Roeger

European Commission, DGECFIN; European Commission

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Don I. Asoka Woehrmann

DWS Investments; University of Magdeburg

Abstract

The paper uses a dynamic 2-country equilibrium model with imperfections in the labour market calibrated for the US and EU economy to investigate dynamic efficiency and equity aspects of international tax competition. We focus on tax policy where governments can only decide on the levels of corporate and labour taxes, given a constant share of government consumption and transfers in GDP and a constant VAT rate. We find that the welfare effect of a tax shift from capital to labour depends heavily on the distortionary nature of labour taxes. In contrast to existing results we find substantial positive international spillover effects of corporate tax reduction in one country, with long term gains outweighing short term losses. Results are very different, however, if one goes beyond the representative agent framework. According to our results, a tax switch is most likely not Pareto improving since net wages tend to decline in both regions even in the long run.

Keywords: International tax competition, equity, efficiency

Suggested Citation

Roeger, Werner and Roeger, Werner and in 't Veld, Jan and Asoka Woehrmann, Don I., Some Equity and Efficiency Considerations of International Tax Competition. Available at SSRN: https://ssrn.com/abstract=312786

Werner Roeger (Contact Author)

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

European Commission ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

CHAR 14/245
Brussels, Bruxelles B-1049
Belgium
(32 2) 2993 577 (Phone)
(32 2) 2957 499 (Fax)

Don I. Asoka Woehrmann

DWS Investments ( email )

Frankfurt
Germany

University of Magdeburg

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

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