COMPETITION IN BUSINESS TAXES AND PUBLIC SERVICES: ARE PRODUCTION-BASED TAXES SUPERIOR TO CAPITAL TAXES?

Although most of the tax competition literature focuses on the provision of local public services to households, several papers analyze tax competition when capital taxes are used to finance local public services provided to businesses, examining the conditions under which such services are provided...

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Bibliographic Details
Published in:National tax journal 2015-09, Vol.68 (3S), p.767-802
Main Authors: Gugl, Elisabeth, Zodrow, George R.
Format: Article
Language:English
Subjects:
Capital gains
Corporate taxes
Efficiency
Federal taxes
Government services
Government spending
Income taxes
Production capital
Production efficiency
Production functions
Production taxes
Property taxes
Public services
Studies
Taxation
Taxes
Value added taxes
VAT
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Summary:Although most of the tax competition literature focuses on the provision of local public services to households, several papers analyze tax competition when capital taxes are used to finance local public services provided to businesses, examining the conditions under which such services are provided efficiently, under-provided, or over-provided. In addition, several prominent observers have noted that "benefit related" business taxation is desirable on both efficiency and equity grounds and argued that such taxation should take the form of a tax based on production, such as an origin-based value-added tax. We evaluate this contention in this paper, comparing the relative efficiency properties of these alternative business taxes. Our simulation results suggest that under many, but not all, circumstances it is more efficient to finance business public services with an origin-based production tax rather than a source-based capital tax.
ISSN:0028-0283
1944-7477
DOI:10.1086/NTJ44015339