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Competition in Unit vs. Ad Valorem Taxes

Ben Lockwood

CSGR Working Paper No. 86/01

June 2001

 

Abstract:

 

This note shows that in the Sodrow-Miesowski-Wilson model, the Nash equilibrium in capital taxes depends on whether these taxes are unit (as assumed in the literature) or ad valorem (as in reality). In a symmetric version of the model with cobb-Douglas technology, public good provision is higher, and residents in both countries are better off, when countries compete in unit taxes.

Keywords: tax competition, unit tax, ad valorem tax

Jel Classification: H20, H25

Address for correspondence:

Professor Ben Lockwood
Department of Economics and CSGR
University of Warwick
Coventry, CV4 7AL, UK
Email: b.lockwood@warwick.ac.uk

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