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Tax Policy When Countries Compete for Third Market Exports
Author(s) -
Mohan Vijay,
Hazari Bharat
Publication year - 2012
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12007
Subject(s) - economics , tax harmonization , delegate , tax competition , tax reform , indirect tax , ad valorem tax , welfare , tax policy , value added tax , international economics , tax revenue , double taxation , competition (biology) , public economics , market economy , computer science , programming language , ecology , biology
We examine the welfare and other consequences of tax policy in a third market export model where duopolists located in two countries compete in prices. With tax competition between governments, we allow for welfare‐maximizing governments in the two countries to delegate tax setting responsibility to policy‐makers who have different objectives than the governments. The unique equilibrium in the tax competition environment involves both governments delegating tax setting responsibility to tax revenue‐maximizing policy‐makers. This equilibrium yields higher welfare for both countries than the outcome when the governments delegate to welfare‐maximizing policy‐makers. The paper also compares tax competition with tax harmonization and shows that when the entire export market is served, tax harmonization improves the welfare of the country that houses the low cost firm, while the other country may be immiserized.