International Repercussions of Direct Taxes

Models of capital tax competition typically assume that countries have identical per-capita endowments. This paper presents a model with endogenous capital and labor supply where countries are unequal, and shows that countries do not necessarily engage in wasteful tax competition, in the sense that public goods are underprovided. We identify situations in which public goods are overprovided depending (i) on the set of distortionary taxes available for governments and (ii) on endowment differences. Numerical simulations indicate that public goods supply is inefficient in the asymmetric Nash equilibrium, even in the presence of residence-based capital taxation.