Discussion Papers 2016

CIRJE-F-1031

"Ad Valorem Capital Tax Competition"

Author Name

Ogawa, Hikaru and Atsushi Yamagishi

Date

November 2016

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Remarks

Abstract

Studies of tax competition have found that using a unit tax is commitment-robust for governments, while we observe ad valorem taxes on capital in practice. This study presents a model that explains the emergence of ad valorem capital tax competition, incorporating an elastic supply of capital in the standard tax competition model. Specifically, it shows that if the elasticity of capital supply is positive, governments adopt the ad valorem tax method and thereby ad valorem tax competition prevails. On the other hand, under a fixed capital supply (i.e., zero elasticity of capital supply), countries compete in unit taxes.

Keywords: tax competition; unit tax; ad valorem tax; elastic capital supply.