An index of capital tax competition

If very specific assumptions are made about the production technology (out-put per worker is a quadratic function of the capital/labor ratio), people’s prefer-ences (identical within any jurisdiction; linear in private good consumption and in public expenditure per capita), and capital supply (fixed), then equilibrium tax rates can be derived in closed form when jurisdictions choose their source– based tax rates on capital non–cooperatively. The focus of this paper is how the size distribution of the population of the different jurisdictions affects equilib-rium tax rates. It is shown that the (population–weighted) average tax rate is determined by a (relatively) simple index, which must increase as the popula-tion distribution becomes more concentrated. The effects of tax harmonization by some subset of the jurisdictions can then be analyzed. Any tax harmoniza-tion by a group of jurisdictions must benefit residents of all jurisdictions not in the group. It must also benefit residents of the largest jurisdiction in the group, and must increase the average payoff of all residents of the group of jurisdictions doing the harmonizing. ∗This paper is a (substantial) revision of the first half of ”Tax Bloc Formation among Leviathans”, generalizing the assumption in that earlier paper that policy makers care only about tax revenue.