TY  - JOUR
AU  - Janeba,Eckhard
AU  - Wilson,John D.
TI  - Tax Competition and Trade Protection
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7402
PY  - 1999
Y2  - October 1999
UR  - http://www.nber.org/papers/w7402
L1  - http://www.nber.org/papers/w7402.pdf
N1  - Author contact info:
Eckhard Janeba
University of Mannheim
Department of Economics
L7, 3-5
68131 Mannheim
Germany
Tel: ++49-621-181 1795
E-Mail: janeba@rumms.uni-mannheim.de

John Wilson
Bureau of Statistics
Middle Eastern Department, Rm 3-544
700 19th Street, NW
Washington, DC 20431
E-Mail: jwilson@itic.org
AB  - This paper reconsiders the question of whether tax competition for mobile capital leads to tax rates on capital that are too low or too high from the combined viewpoint of the competing regions (or countries in an economic union).  In contrast to standard models of tax competition, both commodity trade and capital mobility is allowed to occur between the competing regions and the rest of the world.  A key result of the analysis is that whether the capital taxes are too low or high depends on the degree of external trade protection.  When the country's central government is free to set the tariff, tax competition leads to inefficiently low tax rates.  But in the absence of a tariff, tax rates can be too high.  In particular, regions may choose to subsidize capital in equilibrium as a means of inducing favorable terms-of-trade effects, but the subsidy (i.e., a negative tax) will then be too low because an increase in a single region's subsidy benefits other regions by reducing their relative quantities of subsidized capital.  These results are discussed in the context of the European Union's Single Market, where non-EU firms have responded to the 'Fortress of Europe' by increasing foreign direct investment.
ER  -