Beiträge zur Jahrestagung des Vereins für Socialpolitik 2012: Neue Wege und Herausforderungen für den Arbeitsmarkt des 21. Jahrhunderts - Session: Tax competition B02-V3
We analyze the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, central tax rate in the first stage, and then non-cooperatively set local tax rates in the second stage. We show that this mechanism effectively reduces competition for mobile capital between the members of the union. Even without side payments, the gains from partial coordination are distributed across the heterogeneous members in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. Finally, we show that a dual structure of capital taxation has advantages even in a setting where costly side payments are feasible.