Seignorage and Capital Taxation: Tax Competition Revisited
Paper number: 06/03
Paper date: October 3, 2005
Paper Category: Working Paper
We re-examine the standard view that capital taxes are too low when capital is mobile across tax jurisdictions. We do so by emphasising a previously neglected implication of non-cooperative capital tax setting in a world with national currencies. Namely, capital taxes also affect foreign seignorage. This horizontal externality may lead, ceteris paribus, to too high national capital taxes, and may more than o set the usual effects of tax competition. In this case, and contrary to conventional wisdom, national capital taxes will be too high. Conditions under which the latter is indeed the case are derived and discussed.