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Journal of Economic Integration 2018 December;33(4) :722-772.
Optimal Capital Taxation Rates and Tax Competition in Open Economy

Séverine Menguy 

Université Paris Descartes, France
Corresponding Author: Séverine Menguy ,Tel: 00 33 1 46 68 94 84, Email:
Copyright ©2018 Journal of Economic Integration
The model presented in this paper provides accurate theoretical results regarding optimal taxation rates and fiscal externalities in an open economy. We show that for both capital-importing and capital-exporting countries, capital taxation rates should increase with country size approximated by its capital stock. In parallel, for the smallest countries, the fiscal weight could be very high and strongly relies on the labor production factor. It is also demonstrated that the optimal capital taxation rate increases with the relative preference of the representative consumer for private consumption, in contrast to public consumption, as well as with the capital share in the production function. Furthermore, the presented model shows that the slope of the tax reaction function is positive as soon as the preference of the representative consumer for private goods consumption is sufficiently high.

JEL Classification
H21: Efficiency; Optimal Taxation
H25: Business Taxes and Subsidies
H87: International Fiscal Issues; International Public Goods
Keywords: Tax competition | Capital importing country | Capital exporting country | Optimal capital taxation rate | Fiscal externalities
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