Abstract
The traditional theory of international tax competition for production factors or any of its expansions give neither a satisfactory explanation of the problem that would find confirmation in empirical data nor normative solutions for the shape of the optimal tax system. It seems that such a theory requires consideration of tax avoidance, the complexity of tax systems and fiscal solvency hypothesis. The paper presents a fiscal policy model integrating all the three concepts within the traditional framework of tax competition. Especially we take into account: taxation of consumption, possibility of capital income shifting and – untaxed in the destination country – foreign goods purchases. We conclude that if fiscal policy is by no means unfettered the equilibrium is allocation efficient, provided the marginal rate of substitution between private and public goods to be one. The tax on consumption is hence driven by the tax sensitivity of domestic and foreign purchases and the total volume of foreign purchases in the country and the tax on capital is determined by: the labour productivity effect, the capital income effect, the consumption effect and the tax burden exportation effect. One can show that this approach is especially useful during solvency crisis and can be applied to predict tax rates’ adjustment when the bonds issuance decreases or public debt accelerates.
Highlights
In order to increase production and employment and, household income, a government may set tax rates that attract production factors
Zodrow and Mieszkowski model has a number of simplifying assumptions, namely: − production capabilities of the economies involved in tax competition are symmetric; − each economy produces one private and one public good; − the markets are perfectly competitive; − consumer preferences are homogeneous and distribution of income is uniform; − the only variable and mobile factor of production is capital, and its rate of return is fixed; − government seeks to maximize social welfare measured by the total utility of all consumers (Kudła, 2013)
The paper raises the issue of optimal fiscal policy in an open economy when capital is mobile and, unlike labor, capital income can be shifted abroad and consumers may freely trade cross-border
Summary
In order to increase production and employment and, household income, a government may set tax rates that attract production factors. Economists differently assess the effects of tax competition According to some, this will – assuming free international movement of capital and people – lead to alignment of relations in competing economies between what a taxpayer pays and what he receives in return. The traditional theory of tax competition between countries for the production factors or any of its extensions do not fully correspond to the actual conditions of taxation and give neither a satisfactory explanation of the problem of fiscal competition that would find confirmation in empirical data nor normative solutions for the shape of the optimal tax system. The subsequent section describes the impact of debt parameters on capital, labor and consumption tax adjustment for the unconstraint model with selected functional form It provides some interesting results on the fiscal response triggered by debt parameters and changes of other tax rates.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
