When ad valorem tax prevails in international tax competition

Abstract

The studies on capital tax competition have assumed that the governments compete for mobile capital in unit tax, and this assumption is partially justified by Lockwood (2004), which proves that unit tax competition is always welfare superior to ad valorem tax competition within a framework of symmetric tax competition. This paper presents the reexamination of governments' choice on tax method in the framework of asymmetric tax competition. The results show that asymmetric countries do not compete in the same tax instrument, as assumed in the literature. The capital importing countries compete in ad valorem tax, while the capital exporting countries compete in unit tax.