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Tax Competition, Budget Rigidities, and Fairness Norms
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| | Unformatted Document Text:
9
iii) deviations from a ‘fair’ ratio between taxes on mobile capital and relatively
immobile labor, which enter the loss functions positively. Governments there-
fore seek to avoid ‘unfair’ tax systems.
Given voters’ preferences for low tax burdens, optimal provision of public goods
and tax equity, the government minimizes a loss function of the following type
(
)
(
)
(
)
(
)
(
)
(
)
(
)
g
2
2
,
m
n
m
n
m
n
m
n
n
m
E
M
N
γ
α
β
λ
τ τ
τ
τ
τ
τ
τ
µ τ
τ τ
µ
=
+
+
−
+
+
+
+
+
L
(2)
where
0
, , ,
1
α β γ λ
<
< ,
µ measures deviations from
1
=
n
m
τ
τ
as fairness crite-
rion and E denotes government expenditure. For the sake of simplicity and with-
out loss of generality, we assume the following restriction:
(
)
0
≥
+
−
N
M
E
n
m
τ
τ
.
(3)
In (other) words, governments cannot save. The first order conditions for optimal
tax-rates in closed economies are then
(
)
(
)
(
)
(
)
(
)
1
1
1
2
2
2
3
2
2
2
2
2
0
g
m
m
n
m
m
m
n
n
n
n
m
m
M E
M
N
γ
α
λ
ατ
γ
τ
τ
τ
µ τ
µ τ
τ
τ
λ
τ
τ
µ τ
µ τ
−
−
−
∂
=
−
−
−
∂
+
+
+
−
+
≡
+
+
L
(4)
and
(
)
(
)
(
)
(
)
(
)
1
1
1
2
2
2
2
2
3
2
2
2
0
g
n
m
n
n
m
m
n
n
n
n
m
m
N E
M
N
γ
β
λ
βτ
γ
τ
τ
τ
µ τ
µ τ
τ
τ
λ
τ
τ
µ τ
µ τ
−
−
−
∂
=
−
−
−
∂
+
+
+
−
+
+
≡
+
+
L
.
(5)
To derive a unique solution we skip the last term of the equation that accounts for
tax-fairness and set
1
γ = . Optimal tax policy would then be
(
)
(
)
1/ 1
/
−
=
n
N
β
τ
β
(6)
(
)
(
)
1/ 1
/
−
=
m
M
α
τ
α
(7)
|
| | Authors: Pluemper, Thomas., Troeger, Vera. and Winner, Hannes. |
|
| |
|
|
9
iii) deviations from a ‘fair’ ratio between taxes on mobile capital and relatively
immobile labor, which enter the loss functions positively. Governments there-
fore seek to avoid ‘unfair’ tax systems.
Given voters’ preferences for low tax burdens, optimal provision of public goods
and tax equity, the government minimizes a loss function of the following type
(
)
(
)
(
)
(
)
(
)
(
)
(
)
g
2
2
,
m
n
m
n
m
n
m
n
n
m
E
M
N
γ
α
β
λ
τ τ
τ
τ
τ
τ
τ
µ τ
τ τ
µ
=
+
+
−
+
+
+
+
+
L
(2)
where
0
, , ,
1
α β γ λ
<
< ,
µ measures deviations from
1
=
n
m
τ
τ
as fairness crite-
rion and E denotes government expenditure. For the sake of simplicity and with-
out loss of generality, we assume the following restriction:
(
)
0
≥
+
−
N
M
E
n
m
τ
τ
.
(3)
In (other) words, governments cannot save. The first order conditions for optimal
tax-rates in closed economies are then
(
)
(
)
(
)
(
)
(
)
1
1
1
2
2
2
3
2
2
2
2
2
0
g
m
m
n
m
m
m
n
n
n
n
m
m
M E
M
N
γ
α
λ
ατ
γ
τ
τ
τ
µ τ
µ τ
τ
τ
λ
τ
τ
µ τ
µ τ
−
−
−
∂
=
−
−
−
∂
+
+
+
−
+
≡
+
+
L
(4)
and
(
)
(
)
(
)
(
)
(
)
1
1
1
2
2
2
2
2
3
2
2
2
0
g
n
m
n
n
m
m
n
n
n
n
m
m
N E
M
N
γ
β
λ
βτ
γ
τ
τ
τ
µ τ
µ τ
τ
τ
λ
τ
τ
µ τ
µ τ
−
−
−
∂
=
−
−
−
∂
+
+
+
−
+
+
≡
+
+
L
.
(5)
To derive a unique solution we skip the last term of the equation that accounts for
tax-fairness and set
1
γ = . Optimal tax policy would then be
(
)
(
)
1/ 1
/
−
=
n
N
β
τ
β
(6)
(
)
(
)
1/ 1
/
−
=
m
M
α
τ
α
(7)
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