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Dynamic Tax Competition, Home Bias and the Gain from Non-preferential Agreements

Author

Listed:
  • Kaushal Kishore

    (Department of Economics, University of Pretoria, Pretoria)

Abstract
In a dynamic two-period model of tax competition, where an investor has home bias for the country where he/she invests in the initial period, we show that tax revenue under a non-preferential taxation scheme is strictly higher compared to a preferential taxation scheme. A non-preferential taxation scheme not only increases tax revenue in the later period, it also reduces competition in the initial period. The gain from having a non-preferential regime is strictly increasing in home bias as long as home bias is not large enough. When home bias is above a critical level, the gain from having a non-preferential agreement is independent of home bias. While the literature on tax competition has identified that ``home bias" can make non-preferential taxation preferable to a preferential regime when investors are small with heterogeneous home bias, we show that even when investors are large with a discrete home bias, a non-preferential regime generates higher tax revenue compared to a preferential regime. We show that even when only one of the capital bases has home bias, a non-preferential regime generates higher tax revenue compared to a preferential regime. This paper also quantify the gain from a non-preferential regime with a parameter which captures home bias and provide clear comparative statics. Moreover, we also show that a country has an incentive to unilaterally commit to a non-preferential agreement.

Suggested Citation

  • Kaushal Kishore, 2016. "Dynamic Tax Competition, Home Bias and the Gain from Non-preferential Agreements," Working Papers 201676, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201676
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dynamic Tax Competition; Non-preferential regime; Preferential regime; Home Bias;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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