Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123211
Authors: 
Gugl, Elisabeth
Zodrow, George R.
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper 5555
Abstract: 
We consider a model in which business public services must be financed with either a source-based tax on mobile capital, such as a property tax, or a tax on production, such as an origin-based VAT and assess which of the two tax instruments is more efficient. In general, both a capital tax and a production tax are inefficient. However, the production tax is efficient if the production function belongs to the knife-edge case between log sub- and log supermodularity with respect to capital and public services (e.g., a Cobb-Douglas production function), while the capital tax results in underprovision of public services in this case. Similarly, if the production function is log submodular with respect to capital and public services (e.g., a CES production function with an elasticity of substitution greater than 1), a production tax is again less inefficient than a capital tax, although both taxes result in underprovision of the public service. Finally, if the production function is log supermodular (e.g., a CES production function with an elasticity of substitution smaller than 1), a production tax results in overprovision of the public service, while the e¤ects of a capital tax - and thus the relative efficiency properties of the two taxes - are theoretically ambiguous.
Subjects: 
tax competition
public services provided to business
tax on production vs. tax on capital
JEL: 
H41
H42
H21
H11
Document Type: 
Working Paper

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