Part 1 - AL-Tax

Chapter 8matter corporate taxation – can survive in the long run (Gordon, 1992; Mintz, 1994;Weichenrieder, 2005).8.5.2 What do theories of tax competition tell us?Notwithstanding the findings of the basic models mentioned above, the consequencesof tax competition depend on a complex range of features (for a completediscussion, see Wilson, 1999; Krogstrup, 2003; Zodrow, 2003; Wilson and Wildasin,2004). Over the last 20 years, economic research has attempted to remove the strictassumptions of the basic models of tax competition 3 and has come up with amore finely contrasted picture, which suggests that tax competition does not necessarilylead to a ‘race to the bottom’, and that any calculation of the potentialconsequences needs to take into account the public expenditure side of the problem,as well as various other characteristics, for example the availability of correctivemechanisms across jurisdictions such as subsidies that can substitute forthe need to compete for capital (Wildasin, 1989) or the capacity of tax policyto influence the after-tax rate of return on capital (Wildasin, 1988). The degree of(a)symmetry in the size of countries (Bucovetsky, 1991) or asymmetries inendowment of factors (Wilson, 1991; Kanbur and Keen, 1993) between jurisdictionswill also influence the outcome of tax competition. Geographical locationand the extent of concentration of production may lead to different optimal levelsof taxation between regions, for example in a core-periphery model (Kind et al.,2000; Baldwin and Krugman, 2004). In addition, the existence of trade betweenthe members of a union (Wilson, 1987) or with the rest of the world (Janeba andWilson, 1999) may lead to specialization and hence different equilibrium levelsof taxation. The availability of multiple tax instruments besides capital taxation(Bucovetsky and Wilson, 1991), the existence of economies of scale in publicservice provision (Wilson, 1995), international spillovers in public goods (Bjorvatnand Schjelderup, 2002), and the possibility for the public sector to provide publicinput goods that will either reduce the private cost of production (Keen andMarchand, 1997) or reduce income uncertainty via redistribution (Wilson, 1995)are also elements that will influence the effects of tax competition. Obviously, thedegree of mobility of the factor(s) of production (Lee, 1997; Brueckner, 2000;Wildasin, 2003), the complementarities between mobile and immobile factors(Lee, 1997), a possible home bias in investment (Ogura, 2006), the degree of citizens’demand for social insurance (Persson and Tabellini, 1992), the presence ofcross-border loss offset (Gérard and Weiner, 2003), and the possibility to exportthe tax burden to foreigners (Mintz, 1994; Huizinga and Nielsen, 1997, 2002;181