Working Paper Series, Uppsala Center for Fiscal Studies, Department of Economics, Uppsala University
Ali Sina Onder
Capital Tax Competition When Monetary Competition is Present
Abstract: In a model that allows for international trade in goods
market as well as in money markets, interactions between the capital tax
rate and the inflation rate are investigated. It is shown that interactions
of capital tax rate and inflation rate create horizontal and vertical
externalities. Optimal levels of the capital tax rate and the inflation
rate depend on how these externalities dominate one another. If a currency
union is formed, the inflation rate that prevails across the currency union
will be higher than the inflation rate in either country under monetary
independence, and national public good provision will be suboptimally high.
Inflation elasticities of the demand for a country’s national currency
determine whether capital taxes will be higher or lower under single
currency in that country.
Keywords: Inflation Tax; Capital Tax Competition; Currency Union; (follow links to similar papers)
JEL-Codes: F15; F33; H21; H77; (follow links to similar papers)
29 pages, September 22, 2009
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