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Social comparisons in consumption, international capital flows and tax competition
Author(s) -
Chang JuinJen,
Cheng YiLing,
Peng ShinKun
Publication year - 2017
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12117
Subject(s) - economics , tax competition , externality , consumption (sociology) , competition (biology) , capital (architecture) , microeconomics , monetary economics , international economics , market economy , tax reform , indirect tax , history , ecology , social science , archaeology , sociology , biology
This paper explores the implications of consumption externalities for capital mobility, the distribution of firms and tax competition. In the absence of tax competition, the country with higher consumption externality attracts more capital/firms. In contrast, under tax competition, because the country with higher consumption externality will impose a higher tax rate on capital, due to the strong negative effect of taxation, the country with lower externality attracts more capital. Besides, as trade openness increases, capital agglomerates in the country with lower consumption externality. We also show that there may exist an efficiency‐enhancing role for tax competition.