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See detailIs a dynamic approach to tax games relevant?
Paulus, Nora; Pieretti, Patrice UL; Zou, Benteng UL

in Annals of Economics and statistics (2021), 144

In this paper, we argue that static models provide an incomplete analysis of interjurisdictional tax competition. Accordingly, one can doubt whether a one-shot view is suitable for analyzing real world ... [more ▼]

In this paper, we argue that static models provide an incomplete analysis of interjurisdictional tax competition. Accordingly, one can doubt whether a one-shot view is suitable for analyzing real world tax competition. Contrary to previous contributions in tax competition, we are able to model the interplay between changing tax rates and sluggish factor adjustments. We demonstrate that the intensity of tax competition is impacted by the temporal nature of the game. The commitment of governments to stick to their tax policies for a given period (open-loop behavior) leads to less intense competition relative to a static approach. If the policymakers continuously update their tax rates (Markovian behavior), competition is fiercer than in a static game, except for the case where capital adjustment is relatively sluggish and the governments' marginal valuation of public goods is high enough. [less ▲]

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