Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 24-2005: Capital Income Tax Coordination and the Income Tax Mix

Harry Huizinga and Søren Bo Nielsen
Additional contact information
Harry Huizinga: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Søren Bo Nielsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: Europe has seen several proposals for tax coordination only in the area of capital income taxation, leaving countries free to adjust their labor taxes. The expectation is that higher capital income tax revenues would cause countries to reduce their labor taxes. This paper shows that such changes in the mix of capital and labor taxes brought on by capital income tax coordination can potentially be welfare reducing. This reflects that in a non-cooperative equilibrium capital income taxes may be more distorting from an international perspective than are labor income taxes. Simulations with a simple model calibrated to EU public finance data suggest that countries indeed lower their labor taxes in response to higher coordinated capital income taxes. The overall welfare effects of capital income tax coordination, however, are estimated to remain positive.

Keywords: None

JEL-codes: F20; H87

35 pages, October 14, 2005

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