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Tax policy when countries compete for third market exports

journal contribution
posted on 2012-12-01, 00:00 authored by Vijay Mohan, B Hazari
We examine the welfare and other consequences of tax policy in a third market export model where duopolists located in two countries compete in prices. With tax competition between governments, we allow for welfare-maximizing governments in the two countries to delegate tax setting responsibility to policy-makers who have different objectives than the governments. The unique equilibrium in the tax competition environment involves both governments delegating tax setting responsibility to tax revenue-maximizing policy-makers. This equilibrium yields higher welfare for both countries than the outcome when the governments delegate to welfare-maximizing policy-makers. The paper also compares tax competition with tax harmonization and shows that when the entire export market is served, tax harmonization improves the welfare of the country that houses the low cost firm, while the other country may be immiserized.

History

Journal

Pacific economic review

Volume

17

Issue

5

Pagination

708 - 728

Publisher

Wiley-Blackwell Publishing Asia

Location

Richmond, Vic.

ISSN

1361-374X

eISSN

1468-0106

Language

eng

Publication classification

C1 Refereed article in a scholarly journal; C Journal article

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