Scandinavian Working Papers in Economics

Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics

No 2009:14: Capital Tax Competition When Monetary Competition is Present

Ali Sina Onder ()
Additional contact information
Ali Sina Onder: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

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

JEL-codes: F15; F33; H21; H77

29 pages, September 22, 2009

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