American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Tax Competition for Heterogeneous Firms with Endogenous Entry
American Economic Journal: Economic Policy
vol. 2,
no. 1, February 2010
(pp. 77–102)
Abstract
This paper models tax competition for mobile firms that are differentiated by their productivities. Because taxes affect the distribution of firms, they affect wages, prices, and the number of firms. From the social planner's perspective, optimal taxes efficiently distribute income between private and public consumption and are harmonized, providing the optimal number of firms. This is not a Nash equilibrium. As is common in such models, equilibrium taxes are inefficiently low. Furthermore, there is no pure strategy equilibrium with equal taxes resulting in too many firms. This illustrates a new distortion from tax competition and a new benefit from harmonization. (JEL H21, H25, H87)Citation
Davies, Ronald B., and Carsten Eckel. 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry." American Economic Journal: Economic Policy, 2 (1): 77–102. DOI: 10.1257/pol.2.1.77JEL Classification
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H87 International Fiscal Issues; International Public Goods
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