Tax Competition and Politics: Double-Edged Incentives Revisited
Paper number: 03/04
Paper date: September 2003
Paper Category: Working Paper
Ben Lockwood and Miltiadis Makris
We re-examine, from a political economy perspective, the standard view that higher capital mobility results in lower capital taxes - a view, in fact, that is not confirmed by the available empirical evidence. We show that when a small economy is opened to capital mobility, the change of incidence of a tax on capital - from capital owners to owners of the immobile factor - may interact in such a way with political decision-making so as to cause a rise in the equilibrium tax. This can happen whether or not the fixed factor (labour) can be taxed.