An empirical investigation of tax competition between Canadian provinces

The authors argue that the elasticity of the demand for capital with respect to the capital tax rate is always negative, since the marginal public good valuation (MPGV) 3 is always lower than the marginal cost of the public good. [...] Due to the negative elasticity of the demand for capital with respect to the capital tax rate, the competitive equilibrium level of the capital tax rate is lower than the efficient level. [...] The effect is smaller the greater the size of an economy and the stronger the agglomeration effects, which may explain why the decline in taxes is hard to qualify as a race to the bottom. [...] Moreover, they find evidence of concavity in the tax reaction functions, which supports the idea that the larger the tax rate in a country compared to its neighbours, the stronger the country will react to tax cuts in the neighbouring countries. [...] However they argue that the joint investigation of the determinants of the tax base and tax rates does not support the hypothesis that the positively sloped tax reaction functions arise from competition over the tax base.