Production inefficiency, cross-ownership and regional tax-range coordination

Abstract

Using a simple asymmetric capital-tax competition model where the allocation of mobile capital is distorted in non-cooperative equilibrium, this paper analyzes the welfare impact of regional tax coordination on a range of possible tax rates (a combination of maximum and minimum capital taxes made by a subset of regions). Under the assumption that the ownership of immobile factors (e.g., business land) is diversified across regions, a new possibility of beneficial coordination arises which has not been identified before: tax-range coordination “among capital-exporting regions” or “among capital-importing regions” may improve the welfare of all regions. This is in contrast to the case without cross-ownership where both capital-exporting and capital-importing regions must be involved in tax-range coordination in order to achieve a Pareto improvement.