Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/149242 
Year of Publication: 
2016
Series/Report no.: 
CESifo Working Paper No. 6155
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The implications of high indebtedness for strategic tax setting in internationally integrated capital markets have found little attention so far. We analyze when and how changes in initial debt levels affect the distribution of economic activity across space. When public borrowing is constrained, a rise in a country’s initial debt level lowers investment in public infrastructure and makes tax setting more aggressive in that country, while the opposite occurs elsewhere. On net a country with higher initial debt becomes a less attractive location. Our model is consistent with the observation that highly indebted countries have decreased corporate tax rates over-proportionally. It sheds light on proposals to devolve taxing power to lower levels of governments which differ in initial debt levels.
Subjects: 
asymmetric tax competition
business tax
sovereign debt
inter-jurisdictional tax competition
JEL: 
H25
H63
H73
H87
Document Type: 
Working Paper
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