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A Model of Tradeable Capital Tax Permits
Author(s) -
HUBBARD TIMOTHY P.,
SVEC JUSTIN
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.12127
Subject(s) - economics , capital (architecture) , microeconomics , tax competition , capital outflow , externality , monetary economics , indirect tax , public economics , tax reform , capital formation , financial capital , archaeology , history , profit (economics)
Standard models of horizontal capital tax competition predict that, in a Nash equilibrium, states set tax rates inefficiently due to externalities—capital inflow to one state corresponds to capital outflow for another state. Researchers often suggest that the federal government impose Pigouvian taxes to correct for these effects and achieve efficiency. We propose an alternative incentive‐based regulation: tradeable capital tax permits. Under this system, the federal government would require a state to hold a permit if it wanted to reduce its capital income tax rate from some predefined benchmark. These permits would be tradeable across states. We show that, if the federal government sets the correct number of total permits, then social efficiency is achieved. We discuss the advantages of this system relative to the canonical suggestion of Pigouvian taxes.