Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/61015 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3893
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show (i) that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and (ii) that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner's dilemma since the countries' welfare may be higher if they choose unit taxes.
Subjects: 
tax competition
unit taxes
ad valorem taxes
JEL: 
H20
H21
H77
Document Type: 
Working Paper
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