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Relaxing tax competition through public good differentiation

By Ben Zissimos and Myrna Holtz Wooders

Abstract

This paper argues that, because governments are able to relax tax competition through public good differentiation, traditionally high-tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated. The key assumption is that firms vary in the extent to which public good provision reduces costs. We show that Leviathan governments are able to use this fact to relax the forces of tax competition, reducing efficiency. When firms can ‘vote with their feet’ tax competition leads firms to locate in ‘too many’ jurisdictions. A ‘minimum tax’ further relaxes tax competition, further reducing efficiency

Topics: HB
Publisher: University of Warwick, Department of Economics
Year: 2005
OAI identifier: oai:wrap.warwick.ac.uk:1458

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