تعهد به سیاست و سود اجتماعی از طریق آزادسازی بازار سرمایه

This paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment (time-consistent policies). The transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long-term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent. As a consequence of this taxation shift, welfare increases by about 1 percent. The reduction in capital taxation induced by capital market liberalization is welfare improving because, in the absence of capital mobility, the time-consistent policies over-tax capital.

One of the heated debates in international economics concerns the liberalization of capital markets. A central theme within this debate is the issue of tax policy coordination. It has been argued that, given the fiscal policy autonomy of countries and the increase in the international mobility of capital, policy competition may lead to distortionary tax policies. Indeed, the incentive to attract foreign capital and prevent capital outflow may induce countries to shift the taxation burden from the highly mobile capital to the less mobile labor force. For instance, a shift in the taxation structure is observed in the integration experience of the European countries. As shown in Fig. 1, during the 1980s and the 1990s the implicit tax rate on capital has been decreasing while the implicit tax rate on labor has been increasing.1 Full-size image (35 K) Fig. 1. Implicit tax rates on capital and labor in the European Union. Source: Eurostat, Structure of the taxation systems in the European Union 1970–1997, 2000 edition. Figure options There are reasons to believe that this taxation shift is, at least in part, the consequence of the increasing tax competition among European countries following the gradual removal of barriers to the mobility of capital. This shift in the tax structure is a major concern among European authorities. For example, in the October 1997 communication from the European Commission to the European Council, the Commission concludes: “……This trend in tax structure should be reversed”. Concerns about harmful tax competition, given the globalization of capital markets, are also expressed by the Organization for Economic Cooperation and Development (see OECD, 1998). These concerns are consistent with the empirical study of Devereux et al. (2002) who find that OECD countries do in fact compete over corporate taxes. The goal of this paper is to develop and calibrate a two-country open-economy model to evaluate the quantitative impact of capital liberalization on the taxation structure and the welfare of the liberalizing countries. In the model governments finance exogenous public spending with three types of taxes: a profit tax, a capital income tax, and a labor income tax, under a balanced budget constraint. The difference between the profit tax and the capital income tax relates to the unit of taxation. While the profit tax is paid by firms to the country where they are located (source principle), the capital income tax is paid by the residents of the country independently of whether the income stems from domestic or foreign investment (residence principle). Without the international mobility of capital, the profit tax and the capital income tax would be economically indistinguishable. Governments choose the three tax rates optimally to maximize the welfare of their citizens on a period-by-period basis (time-consistent policies). In characterizing the equilibrium tax policies I restrict the set of strategies played by the two governments to be Markov and the analysis is limited to Markov perfect equilibria. Using this framework the paper shows that, in the absence of tax coordination, capital liberalization leads to: (a) a reduction in the implicit tax rate on capital of 13 percent; (b) an increase in the tax rate on labor of 2 percent; (c) a 1 percent improvement in welfare. These results suggest that the free mobility of capital is the optimal arrangement given the international setting. A corollary to this result is that fiscal policy competition is Pareto superior to policy coordination. This is because the equilibrium with coordinated policies is equivalent to the equilibrium without the mobility of capital. These results depend crucially on the assumption that the two governments decide their policies on a period-by-period basis and they cannot commit to future policies (time-consistency). As shown in the optimal taxation literature,2 in a short time horizon the taxation of capital is less distortionary than the taxation of labor. If the policy maker could commit to long-term policy plans, it would minimize the taxation of capital in the long run. However, in absence of commitment, the long-term plan is time inconsistent. Since in a short horizon the taxation of capital is weakly distortionary, the period-by-period optimization implies that the policy maker will tax capital incomes heavily, not only in the current period, but also in future periods, which is inefficient. The international mobility of capital reduces the incentive to tax capital since this capital may seek out more favorable conditions abroad. This implies that the equilibrium taxation of capital is lower and the welfare of the representative consumer higher. The threat of capital flight compensates for the lack of policy commitment. The result that capital liberalization may improve welfare by reducing the taxation of capital is not new in the literature. Kehoe (1989) showed in a simple two-period model that tax coordination may lead to over-taxation of capital and lower welfare. A similar result is also discussed in Persson and Tabellini (1995). Although the theoretical results are not new, the quantitative impact of capital liberalization (or tax competition) are unknown. One of the contributions of this paper is to study the consequences of capital liberalization quantitatively.3 A second contribution of the paper is to study the effects of capital liberalization in a more general framework than in the previous literature. For example, the model studied in Kehoe (1989) has only two periods and the inputs of capital and labor are not complementary in production. This latter feature leads to the result that the equilibrium tax rate on capital, in absence of coordination, is always zero. In contrast, the current paper studies optimal tax policies in an infinite horizon model with capital and labor complementary in production. Due to the complementarity, the equilibrium taxation of capital is also positive in the non-cooperative equilibrium with mobility. The equilibrium taxes with capital mobility is also studied in Ha and Sibert (1997). In their model, however, agents live only for two periods (overlapping of generations) and the supply of labor is inelastic. This latter feature implies that profit taxes are zero when countries are symmetric. The more general structure of the model used in the current paper (infinite horizon and elastic labor supply) makes it suitable to address quantitative questions. The paper also evaluates the welfare consequences of capital liberalization more specifically for Europe. After calibrating the model to replicate the macroeconomic and fiscal structure of Europe at the beginning of the 1980s—that is, the period before the introduction of major liberalization reforms—the model is used to evaluate the consequences of capital market liberalization experienced by the European countries in the last 2 decades. The changes in tax structure predicted by the model are roughly consistent with the observed changes and they have led to a welfare gain of about 1 percent. Mendoza and Tesar (2003) also evaluate the welfare consequences of tax competition among European countries. Their analysis is different from the current paper in several dimensions. They also consider consumption taxes and the government budget does not have to balance in every period. However, they do not consider the issue of time consistency given that the policy game is played only once by the two governments. The organization of the paper is as follows. Section 2 provides some further evidence about the dynamics of the taxation structure in Europe. Section 3 describes the economic model and Section 4 characterizes the optimization problems of firms, households and governments, and defines the policy equilibrium. Section 5 describes the calibration of the model and Section 6 studies the transition dynamics induced by the liberalization of capital. Section 7 conducts a sensitivity analysis and Section 8 concludes.

Studies in the optimal taxation literature conclude that the taxation of capital should be minimized in the long-run. There are several obstacles to the implementation of this normative recommendation. Among them is the lack of government commitment. Due to time-consistency problems, equilibrium policies over-tax capital and are inefficient. The liberalization of capital markets reduces the incentive to tax capital and improves welfare. The welfare gains are evaluated to be in the order of 1 percent of consumption. These gains will not be achieved if the integrating countries coordinate their fiscal policies as recommended by the October 1997 communication from the European Commission to the European Council.