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Tax Uniformity: A Commitment Device for Restraining Opportunistic Behavior
Author(s) -
DEWIT GERDA,
LEAHY DERMOT
Publication year - 2015
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12104
Subject(s) - commit , investment (military) , incentive , economics , monetary economics , microeconomics , tax credit , government (linguistics) , commitment device , public economics , linguistics , philosophy , database , politics , computer science , political science , law
We show that uniform and differentiated tax systems diverge in their propensity to generate distortionary opportunistic behavior. First, when firms choose investment before the government can commit to its taxes, the tax scheme creates strategic incentives for firms to distort their investment. Second, a system of differentiated taxes has a greater propensity to foster strategic distortions in investment than a uniform tax regime. While the paper makes these points in a set‐up in which polluting firms face an emission tax and invest in abatement, the main message is shown to hold for a wide class of tax policy games.