Is a dynamic approach of tax games relevant?

Nora Paulus (), Patrice Pierreti () and Benteng Zou
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Nora Paulus: CREA, Université du Luxembourg
Patrice Pierreti: CREA, Université du Luxembourg

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: In this paper we argue that static models provide an incomplete analysis of interjurisdictional tax competition. According to Wilson (1987) a static tax competition model might predict the long-run outcomes of government decision making in a dynamic setting. We show that this conjecture is only true when policymakers commit to a tax path at the start of the game without future updates (open-loop behavior), with the proviso that they are time-indifferent and/or capital is perfectly mobile. Static models however never predict future outcomes when policymarkers continuously update their tax rates (Markovian behavior). In particular, we address the following aspects. How do long-run outcomes in a dynamic setting change relative to static games? How does social welfare change accordingly? If policymakers have the choice, which strategical behavior (Markovian or open-loop) should they adopt? In light of this, which one confers the highest social advantage?

Keywords: Dynamic Tax Competition; Differential Games; Markovian Nash Equilibrium; Open-loop Strategy (search for similar items in EconPapers)
JEL-codes: C73 F21 H21 H87 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-gth, nep-ore, nep-pbe and nep-pub
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https://hdl.handle.net/10993/52956 (application/pdf)

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Journal Article: Is a Dynamic Approach to Tax Games Relevant? (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:19-09

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