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Tax Competition and Politics: Double-Edged Incentives

Ben Lockwood & Miltiadis Makris

CSGR Working Paper no. 125/03

September 2003

 

Abstract

 

We re-examine, from a political economy perspective, the standard view that higher capital

mobility results in lower capital taxes - a view, in fact, that is not confirmed by the available

empirical evidence. We show that when a small economy is opened to capital mobility, the change

of incidence of a tax on capital - from capital owners to owners of the immobile factor - may interact

in such a way with political decision-making so as to cause a rise in the equilibrium tax. This can

happen whether or not the fixed factor (labour) can be taxed.

 

 

Keywords: Tax Competition.

 

JEL Classification Numbers: H25, H77