Reforming an Asymmetric Union: On the Virtues of Dual Tier Capital Taxation

Haufler, Andreas and Lülfesmann, Christoph (January 2013): Reforming an Asymmetric Union: On the Virtues of Dual Tier Capital Taxation. Discussion Papers in Economics 2013-1

Abstract

The tax competition for mobile capital, in particular the reluctance of small countries to agree on measures of tax coordination, has ongoing political and economic fallouts within Europe. We analyse the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, federal tax rate in the first stage, and then non-cooperatively set local tax rates in the second stage. We show that this mechanism effectively reduces competition for mobile capital between the members of the union. Moreover, it distributes the gains across the heterogeneous states in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. Finally, we present simulation results, and show that a dual structure of capital taxation has advantages even when side payments are feasible.

• Item Type: Paper
• Keywords: capital tax competition, dual tier taxation, international unions
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Chairs > Seminar for Economic Policy
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: H25, H77, H87
• Language: English

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