Taxation in a global economy theory and evidence

Taxation in a Global Economy In recent years the increasing international mobility of capital, ®rms and consumers has begun to constrain tax policies in most OECD countries, playing a major role in reforming national tax systems Hau¯er uses the theory of international taxation to consider the fundamental forces underlying this process, covering both factor and commodity taxes, as well as their interaction Topics include a variety of different international tax avoidance strategies ± capital ¯ight, pro®t-shifting in multinational ®rms and crossborder shopping by consumers Situations in which tax competition creates con¯icting interests between countries are given particular consideration Hau¯er addresses the complex issue of coordination in different areas of tax policy, with special emphasis on regional tax harmonisation in the European Union A detailed introduction to recent theoretical literature is also included A N D R E A S H A U F L E R is Associate Professor of Public Finance and Social Policy in the Department of Economics, University of GoÈttingen He is the author of Commodity Tax Harmonization of the European Community (1993) and has published articles in journals including Journal of Public Economics, Oxford Economic Papers, Scandinavian Journal of Economics, Fiscal Studies and International Tax and Public Finance Taxation in a Global Economy Andreas Hau¯er University of GoÈttingen PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge, United Kingdom CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York NY 10011±4211, USA 10 Stamford Road, Oakleigh, VIC 3166, Australia Ruiz de AlarcoÂn 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa http://www.cambridge.org # Andreas Hau¯er 2001 This book is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2001 Printed in the United Kingdom at the University Press, Cambridge Typeface 10/12 Plantin System 3B2 A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication data Hau¯er, Andreas Taxation in a global economy / Andreas Hau¯er p cm Includes bibliographical references and index ISBN 521 78276 Taxation Capital movements Taxation of articles of consumption Competition, International Taxation±European Union countries Capital movements±European Union countries Taxation of articles of consumption±European countries I Title HJ2305 H38 2001 336.2±dc21 2001025239 ISBN 0521 78276 hardback Contents List of ®gures List of tables List of general symbols used Preface Introduction 1.1 1.2 Part Market integration Plan of the book page viii ix x xi 1 Tax competition: policy and theory Policy issues 13 A ®rst look at the literature 29 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 Part Direct taxes Indirect taxes Three important ®scal externalities Symmetric vs asymmetric countries The set of tax instruments Firm mobility and imperfect competition Political economy aspects and alternative government objectives Further issues 13 22 31 33 35 36 37 39 Factor taxation An introduction to capital tax competition 47 Capital tax competition and country size 74 4.1 4.2 4.3 4.4 5.1 5.2 Residence- vs source-based capital taxation Capital and labour taxes in a small open economy Tax competition with source-based capital taxes Capital tax competition: empirical evidence A basic model of asymmetric capital tax competition Asymmetric capital tax competition with two tax instruments 48 54 61 67 75 80 v vi Contents 5.3 5.4 5.5 Numerical analysis Asymmetric tariff competition The `third-country problem' and the regional coordination of capital income taxes Factor taxation and income distribution Pro®t-shifting and the corporate tax structure 6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4 Part The benchmark case: cash-¯ow taxation Corporate taxation under pro®t-shifting Discussion and comparison of results Pro®t-shifting and international coordination of corporate tax bases Appendix 8.1 8.2 8.3 8.4 8.5 8.6 Principles of international commodity taxation Two benchmark analyses A simple general equilibrium model with cross-hauling Existence and properties of the Nash equilibrium Tax coordination Welfare effects of commodity tax harmonisation: a comparison with related literature Summary: de®ciencies of the current system Appendix Switching to the origin principle? 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 94 99 100 102 109 111 117 122 124 125 126 131 136 139 142 Commodity taxation The problem of cross-border shopping 8.7 Capital taxation in a median voter model An alternative model of interest groups Nash equilibrium Capital market integration Discussion and comparison of results Political economy and the welfare effects of tax coordination Appendix 86 92 The administration of an origin-based VAT A basic equivalence result with mobile capital Anticipation effects in a three-period model A dynamic model of investment and savings Short-run effects of a switch in the tax regime Discussion and comparison of results Further issues of a switch to the origin principle A preliminary evaluation of the arguments Appendix 9A.1 The investment system 9A.2 International asset accumulation 147 148 152 154 159 165 173 180 182 186 187 189 193 196 202 213 216 222 224 224 225 Contents Part 10 Factor and commodity taxation Optimal taxation with interacting factor and commodity taxes 231 Commodity and pro®t taxation with imperfect ®rm mobility 257 Country size and the location of monopolists 279 10.1 10.2 10.3 10.4 10.5 11 11.1 11.2 11.3 11.4 12 13 vii 12.1 12.2 12.3 12.4 12.5 12.6 Integrating capital and commodity taxes A speci®c-factors model with mobile capital The benchmark: production ef®ciency Constraints on tax instruments Discussion and comparison of results Appendix An ef®cient tax system with public inputs Combining imperfect mobility of ®rms and consumers The optimal tax structure Discussion of results and policy implications Appendix Elements of the new trade theory Description of household and ®rm behaviour Tax competition with symmetric transport costs Tax competition with two instruments Discussion and comparison of results Location rents and corporate taxation in the European Union Appendix 12A.1 The ®rm's exporting option 12A.2 Setting up plants in both countries A and B Summary and policy conclusions References Index 232 233 239 241 247 254 258 259 267 273 276 280 283 288 292 299 302 304 304 305 308 316 335 Figures 4.1 Source-based capital taxation in a small open economy 4.2 Undersupply of public goods through tax competition 5.1 The benchmark case 5.2 The benchmark case and labour tax case 8.1 Multiple Nash equilibria 9.1 Convex installation costs 9.2 The response of the capital stock and its shadow price 9.3 The response of consumption 11.1 Consumer transaction costs 12.1 Market demand curves when countries differ in size viii page 58 65 89 91 162 197 206 208 263 284 Tables 2.1 Taxation of personal capital and labour income in the page OECD, 1989 and 1998 14 2.2 Statutory corporate tax rates and corporate tax revenue in the OECD, 1980±1999 16 2.3 VAT rates in the European Union, 1987 and 1998 25 4.1 Effective average tax rates on labour and capital in the OECD, 1981±1995 70 5.1 Summary of parameter speci®cations 86 5.2 Percentage change in per capita utility in the small country: Nash equilibrium vs coordinated equilibrium 90 6.1 Effects of capital market integration on income, by group 113 6.2 Effects of capital market integration on optimal capital tax rates 116 8.1 Optimal tax responses to a change in transaction costs 171 8.2 Welfare effects of a rise in transaction costs 172 9.1 Welfare effects of an anticipated switch to the origin principle 212 11.1 Optimal tax rates with imperfectly mobile ®rms and consumers 272 ix General symbols used cik  fki Fi gi ki li n pik i qik ri R  tki Ti k ui vi wi !i xik x consumption of good k f1; 2; 3g in country i fA; B; Cg depreciation rate of capital production function for good k in country i best response function of country i public good supply in country i capital stock in country i labour supply in country i number of identical countries, ®rms or consumers producer price of good k in country i (pure) pro®ts in country i consumer price of good k in country i gross return to capital in country i world interest rate elasticity of substitution in consumption tax rate on activity k in country i total tax revenue in country i transaction cost function for activity k direct utility function of country i indirect utility function of country i gross wage rate in country i net wage rate in country i output or endowment of good k in country i