Why Do Most Countries Set High Tax Rates on Capital?

CIRPEE Working Paper No. 07-11

36 Pages Posted: 14 May 2007

See all articles by Nicolas Marceau

Nicolas Marceau

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE)

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics

John D. Wilson

Michigan State University - Department of Economics

Date Written: May 2007

Abstract

We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are the left to set revenue maximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross-country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.

Keywords: Tax Competition, Capital Mobility

JEL Classification: F21, H87

Suggested Citation

Marceau, Nicolas and Mongrain, Steeve and Wilson, John D., Why Do Most Countries Set High Tax Rates on Capital? (May 2007). CIRPEE Working Paper No. 07-11. Available at SSRN: https://ssrn.com/abstract=985541 or http://dx.doi.org/10.2139/ssrn.985541

Nicolas Marceau (Contact Author)

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPEE) ( email )

Ste-Foy, Quebec G1K 7P4
Canada

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3547 (Phone)
604-291-5944 (Fax)

HOME PAGE: http://www.sfu.ca/~mongrain/

John D. Wilson

Michigan State University - Department of Economics ( email )

East Lansing, MI 48824
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
113
Abstract Views
1,114
rank
240,601
PlumX Metrics