Capital Tax Competition in the Presence of Tax Evasion

Abstract

Wildasin [17] and DePater and Myers [7] identified sources of inefficiency in capital tax competition models that should be internalized by the Pigovian device. Incorporating tax-evading behavior into the tax competition model, this paper clarifies another source of inefficiency and examines how the optimal corrective subsidy must be revised. Our results show that the existence of fiscal externality and tax evasion induce an undersupply of public goods as normal goods, and that more complicated subsidy is necessary to achieve an efficient outcome.JEL Classification: H23, H26