TITLE:
Tax Competition and Strategic Delegation with Interregional Asymmetries in Capital Endowment and Income Inequality
AUTHORS:
Takahiro Watanabe
KEYWORDS:
Tax Competition, Strategic Delegation, Asymmetries in Capital Endowment and Income Inequality
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.5,
June
17,
2019
ABSTRACT: This study examines a two-country tax competition model,
in which the capital endowment and income inequality are asymmetric in each
country. Hwang and Cheo [1] and Peralta and van Ypersele [2] show that when
countries differ in capital endowments, the country with the higher capital
endowment sets a lower capital tax rate. However, their studies assume that all
inhabitants are homogeneous. We extend the models of the two aforementioned
studies and conduct an analysis taking into account the asymmetry in income
inequality within countries. The tax rate is set by the policy maker elected by
majority voting in each country’s election. We find that a higher tax rate may
be set in the country with higher capital endowment under certain conditions.
Further, if the income inequality is sufficiently large, the median voters in
each country unambiguously delegate the right to decide the tax rate to
residents who prefer a higher tax rate than their own, regardless of the
capital endowments of the two countries.