وقوع مالیاتی، رای اکثریت و یکپارچه سازی بازار سرمایه

We re-examine, from a political economy perspective, the standard view that higher capital mobility results in lower capital taxes — a view, in fact, that is not confirmed by the available empirical evidence. We show that when a small economy is opened to capital mobility, the change of incidence of a tax on capital–from capital owners to owners of the immobile factor–may interact in such a way with political decision-making so as to cause a rise in the equilibrium tax. This can happen whether or not the immobile factor (labour) can be taxed, and whether or not savings can be subsided under capital mobility.

In spite of the now large literature on capital tax competition, there have been relatively few systematic analyses of the interaction between the level of tax competition and the political process by which taxes are chosen. An early and important exception1 is Persson and Tabellini (1992) – henceforth PT – who stress that with tax competition, voters in a country generally vote strategically by choosing a candidate who, once in office, will tax capital more than the median voter would. In their model, such a candidate has less than the median endowment of capital i.e. is poorer. Via this strategic delegation, the voters precommit to a higher tax rate, thus counteracting the ex post incentive of the policy-maker, once in office, to under-tax capital. So, intensification of tax competition, due to increased capital mobility (capital market integration, CMI), will also induce a change in to a more pro-tax candidate. In this paper, we identify a rather different interaction between changes in CMI and the political process. This works through the impact that CMI has on the incidence of the tax on capital. Unlike PT, this effect does not require representative democracy or strategic behavior by countries. Indeed, in our model, countries are small and democracy is direct. Nevertheless, the effect of this interaction is quite striking: under empirically quite plausible conditions, the equilibrium tax on capital can rise following CMI, in contrast to the standard conclusion that taxes are lower in economies open to capital mobility. 2 The key feature of our model is that (unlike PT) there are two factors of production in every country, one internationally immobile (labour) and one possibly internationally mobile (capital), and the before-tax prices of factors are not fixed. Indeed, our model is simply the standard Zodrow and Mieszkowski (1986) one, but where agents in any country are allowed to be completely heterogeneous in their labour and capital endowments, and also their preferences over the public good.3 Decisions over tax rates are made by majority voting. Consider the simplest case, where the only tax instrument is a capital tax and all voters value the public good equally. Then, in our model, following capital market integration, the incidence of the capital tax changes: the burden of the tax shifts from owners of capital to owners of labour. As agents within a given country are heterogenous, the change in the incidence of the capital tax, following CMI, will generally cause a change in the attitude of the median voter toward taxation (and may also change the identity of the median voter—but this is not crucial). Specifically, without capital mobility, owners of capital bear the entire burden of the tax; the after-tax price of capital decreases by the full amount of the tax, while the wage is fixed by the level of inelastically supplied capital.4 So, any voter's marginal contribution to the cost of public good provision is proportional to his capital endowment. This implies that the median voter in the closed economy (i.e., the voter whose ideal tax and level of public good provision is the median one in the population) is the owner of the median capital endowment. So, in the closed economy, in equilibrium, the tax will be determined by the size of the median capital endowment. With capital mobility, instead, the entire burden of the tax is shifted to owners of the immobile factor of production (labour), as each country is small and takes the after-tax price of capital as given. So, now, any voter's marginal contribution to the cost of public good provision is proportional to his labour endowment. So, the median voter in the open economy case is the owner of the median labour endowment, and the equilibrium tax is thus determined by the size of the median labour endowment. 5 So, other things equal, if the median capital endowment is high (relative to the average capital endowment), and the median labour endowment is low (relative to the average labour endowment), the median voter's demand for the public good (and therefore the tax) will be low in the closed economy, and high in the open economy. Call this the tax incidence effect of capital market integration. Of course, following capital market integration, other things are not equal: from the point of view of the median voter in a given country, the elasticity of capital employed in that country with respect to the capital tax, formerly zero, is now positive, and so the marginal cost of public funds rises from unity to a value greater than unity, causing the policy-maker to choose a lower tax. Call this latter effect the tax competition effect. In a model with a representative household, or with a benevolent policy-maker that maximises the sum of utilities, only the tax competition effect will be at work, and this leads to the classic result that the tax on capital falls in response to CMI. However – and this is the main result of our paper – in our model, it is perfectly possible for the tax incidence effect to outweigh the tax competition effect, so that equilibrium capital tax rate rises, following capital market integration. Indeed, under some conditions (basically, when the marginal cost of public funds is close to unity in the open economy) the difference in the median endowments does not have to be large to result in a rise in capital taxes. Some basic calibrations imply that in practice, the relevant marginal cost of public funds is not too far from unity. Of course, this basic result is open to the objection that in practice, income from capital is more unequally distributed than income from labour (see for instance Goodman et al. (1997)), implying that the more likely scenario is that the median capital endowment – relative to the average – is lower than the median labour endowment, implying that the tax incidence effect would work in the same direction as the tax competition effect. As shown in detail below, this difficulty can be overcome by allowing voter preferences over the public good to differ. Then, equilibrium taxes are determined by the preference-adjusted capital and labour endowments in the closed and open economy cases, and then it is quite possible for the tax incidence effect to offset and dominate the tax competition effect even while the median capital endowment is lower than the median labour share (see Example 1 below). A second question is whether our result is robust to allowing the government to have access to taxes other than the capital tax. We show fairly comprehensively that our result extends to this more realistic case, given that conditions are assumed that are sufficient to ensure an equilibrium outcome with majority voting i.e., a Condorcet winner (with multiple taxes, the policy space is multi-dimensional, and so a Condorcet winner does not exist without further restrictions). Specifically, in Section 3, we first assume that the government has a labour tax, as well as a capital tax, but the two taxes are proportional to each other, thus making the policy space one-dimensional. This is realistic for some countries such as the UK, where the personal tax rates on both kinds of income are in fact equal.6 Second, in Section 4, we allow the government access to unrestricted labour and capital taxes, and also a savings subsidy.7 In this case, we make the intermediate preference assumption (Persson and Tabellini (2000)), by assuming that preference-adjusted labor and capital shares are linearly related, which is again sufficient to ensure a Condorcet winner. In both cases, the basic argument presented above generalizes quite straightforwardly. Our paper is related to three literatures, the first of which is discussed in more detail below in Section 6. First, there are some papers which show that equilibrium taxes may rise in some or all countries following CMI (for instance, DePater and Myers (1994), Wilson (1987), Huizinga and Nielsen (1997), Noiset (1995) and Wooders, Zissimos and Dhillon (2001)). However, in these models, the rise in taxes is generated by some modification of the economic environment relative to the standard tax competition model, rather than any interaction between tax incidence and the political process. Second, there is a growing body of empirical evidence that CMI has not clearly led to cuts in corporate tax rates, at least for OECD countries. Specifically, recent studies by Hallerberg and Bassinger, 1998 and Hallerberg and Bassinger, 2001, Devereux, Lockwood, and Redoano (2003), Garrett (1998), Quinn (1997), Rodrik (1997), Swank and Steinmo (2002)) find rather mixed effects of relaxation of exchange controls on the capital account on corporate tax rates. Our paper provides one possible explanation for this. Finally, there is a view in the political economy literature that (at least when preferences are single-peaked) models of direct democracy are observationally very similar to models with benevolent dictators who maximise (for example) the sum of utilities. Indicative of this view are the models and discussions in Persson and Tabellini (2000) pp. 319, 331 and Besley and Smart (2001). Our analysis shows that this is not always the case: the comparative statics of our model when CMI changes is qualitatively different with a median voter and a benevolent dictator. The organization of the paper is the following. Section 2 describes the model. Section 3 characterizes the equilibria with and without capital mobility when labour taxes are allowed, but are assumed to be proportional to capital taxes. Section 4 does the same in the general case of no restrictions on taxes, but with the intermediate preference assumption. Section 5 discusses the extension to the case of elastic savings and labour supply. Section 6 discusses related literature in some depth and finally, Section 7 concludes the paper.

This paper provides one possible explanation for why taxes on capital may not fall, but rise, following capital market integration. Our explanation is based on three simple ingredients: equilibrium tax-shifting in the ZMW model, heterogeneity between agents within countries, and decision-making through a political process such as majority voting, rather than benevolent dictatorship. These interact to produce the incidence effect on equilibrium taxes following capital market integration. If the differences between the median preference-adjusted endowments of the mobile factor (capital), and the fixed factor (land) are large enough, the incidence effect may more than offset the usual effects of tax competition, and cause equilibrium taxes to rise. We also show that the same logic applies to the case where capital and labour can be taxed separately.