Social comparisons in consumption, international capital flows and tax competition

Authors


  • We thank the editor and an anonymous referee for their constructive comments, which helped us to improve the paper. Also, we are grateful for valuable comments and suggestions from Wen-Tai Hsu, Tomoya Mori, Ping Wang, and Dao-Zhi Zeng, as well as participants of the Fifth Asian Seminar in Regional Science, the 2015 annual meeting of the Taiwan Economic Association, and the CEANA session in the 2016 AEA annual meeting. Financial support from the Ministry of Science and Technology (MOST 104-2410-H-029-004) is gratefully acknowledged.

Abstract

This paper explores the implications of consumption externalities for capital mobility, the distribution of firms and tax competition. In the absence of tax competition, the country with higher consumption externality attracts more capital/firms. In contrast, under tax competition, because the country with higher consumption externality will impose a higher tax rate on capital, due to the strong negative effect of taxation, the country with lower externality attracts more capital. Besides, as trade openness increases, capital agglomerates in the country with lower consumption externality. We also show that there may exist an efficiency-enhancing role for tax competition.

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