Kant-Nash Tax Competition

37 Pages Posted: 5 Apr 2019

See all articles by Thomas Eichner

Thomas Eichner

University of Siegen - School of Economic Disciplines

Rudiger Pethig

University of Siegen - School of Economic Disciplines; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2019

Abstract

In a two-country economy we analyze how tax competition differs from the standard all-Nashian tax competition, if one or both countries are Kantians in Roemer’s sense. Kantians are shown to choose a higher tax rate than Nashians for any given tax rate of the other country, which indicates that they seek to mitigate the (Nashian) race to the bottom. We avoid dealing with multiple equilibria by assuming that capital is sufficiently scarce, and we find for symmetric countries that the all-Kantian tax competition is efficient and that the inefficient race to the bottom is weakened in economies with a Nashian and a Kantian. That confirms the intuitive idea that countries following the Kantian categorical imperative avoid or at least soften the socially undesirable impact of (Nashian) self-interest. We also investigate the incentives of opportunistic countries to choose Nashian or Kantian behavior out of self-interest and find that either both governments choose to behave as Kantians or that - under different conditions - the robust Nashian selfinterest supersedes Kantian moral principles such that the inefficient all-Nashian tax competition results.

Keywords: tax competition, best reply, Kantian, Nashian, endogenous behavior selection

JEL Classification: H730, H870, C720

Suggested Citation

Eichner, Thomas and Pethig, Rudiger, Kant-Nash Tax Competition (2019). CESifo Working Paper No. 7571. Available at SSRN: https://ssrn.com/abstract=3366587

Thomas Eichner (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Rudiger Pethig

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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