The dilemma of international capital tax competition in the presence of public capital and endogenous growth

Stauvermann, Peter J. and Kumar, Ronald R. (2014): The dilemma of international capital tax competition in the presence of public capital and endogenous growth.

Abstract

Using an OLG-model with endogenous growth and public capital we show, that an international capital tax competition leads to inefficiently low tax rates, and as a consequence to lower welfare levels and growth rates. Each national government has an incentive to reduce the capital income tax rates in its effort to ensure that this policy measure increases the domestic private capital stock, domestic income and domestic economic growth. This effort is justified as long as only one country applies this policy. However, if all countries follow this path then all countries will be made worse off in the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: capital tax competition, OLG model, endogenous growth, public capital
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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