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Tax Interactions with Asymmetric Information and Nonlinear Instruments

  • Political Science


Centre d’Analyse Théorique et de Traitement des données économiques W o rk in g P a p e rs S e rie s CATT WP No. 9. November 2009 Tax Interactions with Asymmetric Information and Nonlinear Instruments Florence Touya Université de Pau et des Pays de l’Adour Available online at TAX INTERACTIONS WITH ASYMMETRIC INFORMATION AND NONLINEAR INSTRUMENTS Florence TOUYA 20 janvier 2009 Abstract When di¤erent layers of government exert their taxing power upon a common base, the de- cisions made by one tier a¤ect the receipts that the other policymakers can collect. Likewise, when same level authorities derive their receipts from a mobile tax base, a competition mecha- nism takes place that triggers externalities. This paper proposes a model where both horizontal and vertical interactions take place. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided through the choice of the instruments, in order to assess the robustness of traditional analyses results in a more general and realistic scheme. With respect to a unique government framework, an excessively high level of taxation emerges from the simultaneous interplay of horizontal and vertical tax externalities. Keywords : Vertical and horizontal tax externalities, Informational asymmetry, Tax compe- tition, Common Agency, Nonlinear taxes. JEL Classi cation : D72, D82, H23, H30, H32, H71, H77. . 1 1 Introduction Mobile tax bases are at the root of strategic tax competition, both within and between countries. Vying for mobile tax bases has been shown to put downward pressure on the degree of taxation. Indeed, when a decisionmaker unilaterally and independently raises her tax rate, the mobile base can move into neighbouring jurisdictions, thereby reducing the amount of tax receipts that can be collected in the locality that implemented

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