An applied general equilibrium model of international tax competition among the group of seven countries

Abstract

Increasing capital mobility in the 1980s suggests governments have become more sensitive to tax rate differentials. This article constructs a general equilibrium model of international tax competition. The model is applied to a 1982 benchmark data set of the Group of Seven countries. The key results are that corporate tax rates decrease and converge to a central value. Additionally, domestic tax reform generates an international externality in the world capital market. Although tax competition results in lower capital tax rates, all countries are worse off. Larger countries, because of their larger capital stocks, tend to loss less than smaller countries.