Local capital tax competition and coordinated tax reform in an overlapping generations economy

Abstract

We extend the classic capital tax competition model to an overlapping generations economy and study the effects of a coordinated reform where capital tax rates across all locations are increased to alleviate the policy externality. Welfare across generations is examined and several new effects are derived. Simulations calibrated to US data indicate these effects may be as large as the spending effect of the classic model. The initial old generation, however, may not be better off, and an additional transfer from the initial young to the initial old may be required for the reform to be a Pareto improvement.Tax competition Overlapping generations Welfare effects