Taxation in a global economy theory and evidence

Taxation in a Global EconomyIn recent years the increasing international mobility of capital, ®rms andconsumers has begun to constrain tax policies in most OECD countries,playing a major

Taxation in a Global Economy

In recent years the increasing international mobility of capital, ®rms andconsumers has begun to constrain tax policies in most OECD countries,playing a major role in reforming national tax systems Hau¯er uses thetheory of international taxation to consider the fundamental forces under-lying this process, covering both factor and commodity taxes, as well as theirinteraction Topics include a variety of different international tax avoidancestrategies ± capital ¯ight, pro®t-shifting in multinational ®rms and cross-border shopping by consumers Situations in which tax competition createscon¯icting interests between countries are given particular consideration.Hau¯er addresses the complex issue of coordination in different areas oftax policy, with special emphasis on regional tax harmonisation in theEuropean Union A detailed introduction to recent theoretical literature isalso included

AN D R E A S HA U F L E R is Associate Professor of Public Finance and SocialPolicy in the Department of Economics, University of GoÈttingen He is theauthor of Commodity Tax Harmonization of the European Community (1993)and has published articles in journals including Journal of Public Economics,Oxford Economic Papers, Scandinavian Journal of Economics, Fiscal Studies andInternational Tax and Public Finance

Taxation in a Global Economy

Andreas Hau¯er

University of GoÈttingen

P U B L I S H E D B Y T H E P R E S S S Y N D I C A T E O F T H E U N I V E R S I T Y O F C A M B R I D G E The Pitt Building, Trumpington Street, Cambridge, United Kingdom

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# Andreas Hau¯er 2001

This book is in copyright Subject to statutory exception

and to the provisions of relevant collective licensing agreements,

no reproduction of any part may take place without

the written permission of Cambridge University Press.

First published 2001

Printed in the United Kingdom at the University Press, Cambridge

Typeface 10/12 Plantin System 3B2

A catalogue record for this book is available from the British Library

Library of Congress Cataloguing in Publication data

1 Taxation 2 Capital movements 3 Taxation of articles of consumption.

4 Competition, International 5 Taxation±European Union countries 6 Capital movements±European Union countries 7 Taxation of articles of

consumption±European countries I Title.

HJ2305 H38 2001

336.2±dc21 2001025239

ISBN 0521 78276 7 hardback

Part 1 Tax competition: policy and theory

3.5 Political economy aspects and alternative government

Part 2 Factor taxation

5.2 Asymmetric capital tax competition with two tax

v

5.3 Numerical analysis 86

5.5 The `third-country problem' and the regional coordination

7 Pro®t-shifting and the corporate tax structure 125

7.4 Pro®t-shifting and international coordination of corporate

Part 3 Commodity taxation

8.6 Welfare effects of commodity tax harmonisation:

vi Contents

Part 4 Factor and commodity taxation

10 Optimal taxation with interacting factor and

11 Commodity and pro®t taxation with imperfect ®rm

12.6 Location rents and corporate taxation in the

4.1 Source-based capital taxation in a small open

4.2 Undersupply of public goods through tax competition 65

9.2 The response of the capital stock and its shadow price 206

12.1 Market demand curves when countries differ in size 284

viii

5.2 Percentage change in per capita utility in the small country:

6.1 Effects of capital market integration on income, by group 1136.2 Effects of capital market integration on optimal capital tax

8.1 Optimal tax responses to a change in transaction costs 1718.2 Welfare effects of a rise in transaction costs 1729.1 Welfare effects of an anticipated switch to the origin

11.1 Optimal tax rates with imperfectly mobile ®rms and

ix

General symbols used

cik consumption of good k 2 f1; 2; 3g in country i 2 fA; B; Cg

 depreciation rate of capital

fi

k production function for good k in country i

Fi best response function of country i

gi public good supply in country i

ki capital stock in country i

li labour supply in country i

n number of identical countries, ®rms or consumers

pi

k producer price of good k in country i

i (pure) pro®ts in country i

qik consumer price of good k in country i

ri gross return to capital in country i

R world interest rate

 elasticity of substitution in consumption

tik tax rate on activity k in country i

Ti total tax revenue in country i

k transaction cost function for activity k

ui direct utility function of country i

vi indirect utility function of country i

wi gross wage rate in country i

!i net wage rate in country i

xi

k output or endowment of good k in country i

x

International taxation and tax competition have been among the nant and most rapidly expanding ®elds in the recent public ®nanceliterature Despite the wealth of analyses, however, there are still onlyvery few books on these subjects which offer a synthesising and integrat-ing treatment of seemingly disparate issues discussed in professionaljournal articles This relative lack of broad-based analytically orientedstudies in international taxation has been my main motivation to puttogether the present book A special feature of this volume is that itcovers issues in both international commodity and factor taxation, aswell as their interaction Furthermore, I have made an attempt to exten-sively compare the results derived with those obtained in related andrecent literature

domi-In many respects this book is a joint research effort Several chaptersdraw on joint work with Wolfgang Eggert (chapter 5), Bernd Genser(chapters 9 and 11), Sùren Bo Nielsen (chapter 9), GuttormSchjelderup (chapter 7), Peter Birch Sùrensen (chapter 9), and IanWooton (chapter 12) I wish to thank all my co-authors for the permis-sion to use these joint results in the present volume, as well as fornumerous helpful comments on the chapters in which they were notdirectly involved Most of all, I am indebted to Bernd Genser, my aca-demic teacher, who has supported the development of this book in everypossible respect I would also like to thank Friedrich Breyer, WolframRichter and Wolfgang Wiegard, who have reviewed a previous version ofthe entire manuscript of my habilitation thesis in Konstanz Individualchapters have bene®ted greatly from the comments and suggestions of alarge number of colleagues; in particular I would like to mention MaxAlbert, Lans Bovenberg, Sam Bucovetsky, Sijbren Cnossen, MichaelDevereux, Hans Fehr, Harry Huizinga, Mick Keen, Ben Lockwood,JuÈrgen Meckl, Jack Mintz, Wolfgang Peters, GuÈnther Schulze andHans-Werner Sinn

Most of the research documented in this book was undertaken at theUniversity of Konstanz where I have bene®ted greatly from the

xi

Sonderforschungsbereich `Internationalization of the Economy' I amvery grateful to its chairman, Hans-JuÈrgen Vosgerau, for having providedthis stimulating research environment The groundwork for a substantialpart of the analyses was laid, however, when I was a Visiting Scholar atthe University of Western Ontario in London, Canada During thisperiod, the help from John Whalley, Carlo Perroni and Ig Horstmannproved to be critical Another important stimulus was provided by themeetings of the European Union's Human Capital and MobilityProgramme `Fiscal Implications of European Integration', and I amgrateful to Dieter BoÈs for admitting me to his team I also thankBarbara Docherty and Ashwin Rattan from Cambridge UniversityPress for their professional and competent help and three anonymousreferees who made a number of valuable suggestions to improve themanuscript The largest debt I owe to my wife Kerstin for all her sup-port, endurance and sacri®ce during an intense period of starting both acareer and a family at the same time.

Andreas Hau¯er

xii Preface



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