Capital tax competition and social security
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The classic capital tax policy externality is studied in the presence of a social security program where both the benefits and taxes depend on wages in an overlapping generations economy with many countries and mobile capital. We study the response and welfare implications of a coordinated capital tax rate increase across countries competing for the mobile tax base on the initial generations, the transition, and the steady state. The tax increase is initially completely capitalized, but some of the burden is shifted to labor on the transition path and in the steady state. Several new welfare effects are uncovered including an effect involving the parameters of the social security program. Sufficient conditions are provided so that all current and future generations are better off from the reform. However, social security may reduce the gain to capital tax reform.
KeywordsTax competition Social security Overlapping generations Savers and myopes
JEL ClassificationH2 H5 H7 R1 R5
The author would like to thank Toshihiro Ihori and Gilad Aharonovitz for their helpful comments, and Laci Graciano for help in preparing the manuscript. Thanks are also due to the editor Jay Wilson and several helpful reviewers. The usual caveat applies.
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