Hotelling Tax Competition
57 Pages Posted: 8 May 2003
Date Written: April 2003
This paper shows how competition among governments for mobile firms can bring about excessive differentiation in levels of taxation and public good provision. Hotelling's Principle of Minimum Differentiation is applied in the context of tax competition and shown to be invalid. Instead, when an equilibrium exists, differentiation of public good provision is maximized. Non-existence of equilibrium, which is possible, is a metaphor for intense tax competition. The paper also shows that, to some extent, perfect tax discrimination presents a solution to the existence problem created by Hotelling tax competition, but that the efficiency problem of Hotelling tax competition is exacerbated.
Keywords: Hotelling, Limit Tax, Perfect Tax Discrimination, Tax Competition
JEL Classification: H1, H25, H73, H87
Suggested Citation: Suggested Citation