DOI 10.1007/s10797-012-9258-4 Asymmetric tax competition in the presence of lobbying

Abstract This paper incorporates the influence of interest groups into the asymmet-ric tax competition model to explain the phenomenon that small countries do not necessarily set lower capital tax rates than large countries. In addition to the effi-ciency effect considered by the standard model, which leads the smaller country to set a lower capital tax rate, this present paper also takes account of the political effect arising from lobbying. We show that the smaller country may face less downward po-litical pressure. If the political effect outweighs the efficiency effect, then the smaller country sets a higher tax rate than the larger country. This result has several welfare implications, which are in contrast to the conventional consequences