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Is tax competition necessarily a Race to the bottom? Optimal tax rate trajectories in the model of tax competition for different objective functions

Sokolovskyi, Dmytro (2021): Is tax competition necessarily a Race to the bottom? Optimal tax rate trajectories in the model of tax competition for different objective functions.

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Abstract

The work is devoted to research government tax behavior in tax competition conditions. In detail we study followed issues: is necessarily tax competition lead to Race to the bottom & is possible a simultaneous optimum of tax rate for both economies? This work is the continuation of research about, is it necessarily a Race to the bottom Prisoner’s dilemma. Available studies of tax competition generally focus on the analysis, which countries are inherent the trend to tax rate decrease, can this trend be considered a Race to the bottom, but if not, what are the reasons, that a Race to the bottom is not observed? The difference of the proposed work is that we do not consider additional, though important factors. The optimization model of tax competition for 2 economies evidence that even for one factor – the generalized tax burden, without the separation of income tax and “compensatory” taxes, such as taxes on consumption, labor, environment – a Race to the bottom is not necessarily. Under different conditions, the trend can be directed as to decrease as to increase of tax rate. So, it can be argued that tax competition not necessarily leads to Race to the bottom, as well as Race to the bottom is not necessarily modeled by Prisoner’s dilemma. The obtained results can help understand why some countries do not always follow the general trend to tax rate decrease. In addition, it explains not always the optimal tax behavior of some countries those in this way cause a change in the trend in competitors.

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