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Multijurisdictional Economies: Trade and Tax/Amenity Competition

Abstacts of completed papers

"How Reasonable are Assumptions Used in Theoretical Models: Computational evidence on the likelihood of trade pattern changes" Lissandro Abrego, Raymond Riezman and John Whalley (2001)

"Government collusion in Janeba's model of multijurisdictional tax competition" Lloyd Barton Published in Economics Bulletin (2002, Vol. 8, No. 1.)

Eckhard Janeba (Dec 2000 "Tax Competition when Governments lack Commitment" American Economic Review 90, 1508-19) has recently suggested a novel approach to modelling the relationship between governments and multinational firms. As part of ongoing research into various aspects of multijurisdictional tax competition, this paper investigates the possibility of
allowing for collusion between governments when setting tax rates in the model. The findings show that a self-enforcing agreement is possible, with the beneficial effect of cutting the firm's excess profits, limiting investment in excess capacity, and raising government revenue.

"The British and French Fuel Tax Protests: A Game-theoretic Analysis" Lucia Buenrostro, Amrita Dhillon and Myrna Wooders, University of Warwick

In 2000, due to a combination of high tax and oil prices, Europe faced a big rise in fuel prices. This increase motivated a series of protests calling for a cut in taxes. A wave of demonstrations started in France and spread across other countries, including the UK. In France the conflict was resolved when the government agreed to a cut in the fuel tax. In the UK the protesters called off their actions with their demands unfulfilled. In this paper we provide a game-theoretic explanation of the series of events. We use the model in Kreps and Wilson (1982) to explain the differences between the French and the British government to deal with the protests. We extend our analysis to a framework where potential protesters estimate the likelihood of a successful protest using the outcomes in other jurisdictions. This results into a situation where governments care about other governments' decisions.

"Do countries compete over corporate tax rates?"(2002), Michael P. Devereux, Ben Lockwood and Michela Redoano, CEPR Discussion Paper 3400.

Presented (during 2001 and 2002) at:
Seminars at Universities of Copenhagen, Edinburgh, Keele, Newcastle, Warwick; and at Inland Revenue and IMF.
Conferences at Institute for Fiscal Studies, London; Research Council of Norway (for academic and government economists) Oslo.

This paper develops theoretical and empirical work on competition in tax setting between countries. We develop the theoretical literature in two dimensions -- allowing for mobility of firms -- to generate alternative testable hypotheses. We apply (and develop further) modern spatial econometric techniques to test the hypotheses. We find evidence of tax competition consistent with our models. We plan to submit this paper to the American Economic Review in the near future.

"Corporate income tax: reforms and tax competition" (2002), Michael P. Devereux, Rachel Griffith and Alexander Klemm, Economic Policy, 35, 451-495.

Presented at conferences: CEPR, Madrid, April 2002; Institute for Fiscal Studies, London, 2001.

This paper reviews reforms to corporate taxes in OECD countries over the last two decades. This is a far from straightforward exercise, since it is difficult to develop and use appropriate summary measures of tax systems. We provide a number of stylised facts, summarising the nature of reforms. We consider whether existing theoretical models of tax competition predict the observed reforms. Broadly, they cannot: we discuss alternative approaches which would be consistent with observed reforms.

"Capital account liberalisation and corporate taxes" (2002), Michael P. Devereux, Ben Lockwood and Michela Redoano, IMF Discussion paper, forthcoming.

This paper was largely developed while Ben Lockwood was visiting the IMF. It addresses weaknesses in the existing literature (mainly in Political Science) examining the evidence for the pressures on corporate taxes when countries liberalise capital controls. Two results are important. First, countries adjust their corporate taxes when other countries liberalise, not just when they liberalise themselves. Second, there is an important strategic interaction -- the more liberal the capital controls, the more countries respond to changes in other countries' tax rates.

"Pay the Poor, Reduce Crime? Tax Competition, Labour Mobility and Crime" (2001) Paul Randle, University of Warwick Department of Economics Masters Thesis

This paper considers three ways in which a jurisdiction can reduce crime: paying benefits to the poor, forcing convicted criminals to pay fines and incarcerating convicted criminals. When people are mobile across jurisdictions, the tax rates levied on the rich are higher than they would be in a single jurisdictional world. However, the less mobile people are, the more crime they are prepared to tolerate. Whilst incarceration is not the best method of crime control, no conclusions can be drawn between non-punitive fines and benefits. Punitive fines can give the rich a lower utility than non punitive fines. However, transfer payments have an advantage as the same tax rate can maximise the utility of both the rich and the poor. Therefore only transfer payments have the possibility of being Pareto optimal.

"Hotelling Tax Competition" Myrna Wooders and Ben Zissimos, University of Warwick (2002)

"Tax Competition Reconsidered" Myrna H Wooders, Ben Zissimos and Amrita Dhillon

In a classic model of tax competition, we show that the level of public good provision and taxation in a Nash equilibrium can be efficient or inefficient with either too much, or too little public good provision. The key is whether there exists a unilateral incentive to deviate from the efficient state and, if so, whether this entails raising or lowering taxes. A priori, there is no reason to suppose the incentive is in either one direction or the other. In addition, we demonstrate conditions ensuring existence of an asymmetric Nash equilibrium with efficient public good provision. As in prior literature, local amenities enhance capital's productivity. Prior literature, however, focuses on under-provision of public goods.

"Why are Trade Agreements Regional?" Ben Zissimos University of Warwick (2002)