Optimal Capital Taxation Rates and Tax Competition in Open Economy

Abstract

The model presented in this paper provides accurate theoretical results regarding optimal taxation rates and fiscal externalities in an open economy. We show that for both capitalimporting and capital-exporting countries, capital taxation rates should increase with country size approximated by its capital stock. In parallel, for the smallest countries, the fiscal weight could be very high and strongly relies on the labor production factor. It is also demonstrated that the optimal capital taxation rate increases with the relative preference of the representative consumer for private consumption, in contrast to public consumption, as well as with the capital share in the production function. Furthermore, the presented model shows that the slope of the tax reaction function is positive as soon as the preference of the representative consumer for private goods consumption is sufficiently high.