Taxing capital and labor when both factors are imperfectly mobile internationally

Abstract

We revisit the standard theoretical model of tax competition to consider imperfect mobility of both capital and labor. We show that the mobility of one factor affects the taxation of both factors and that the "race-to-the-bottom" narrative (with burden shifting) applies essentially to capital-exporting countries. We validate our predictions using a panel of 29 OECD countries over the period of 1997-2017. The quantitative contribution of rising capital mobility to the decline of corporate income tax rates over our sample period is nonetheless less than that of population ageing.

Keywords: Globalization; Imperfect factor mobility; Tax competition.

Fig. 1

Impact of capital mobility on taxation: net capital exporter ($\overline{k}=16$) Note: The horizontal axis represents different values of ${\varphi }_K$. Source: Model simulations

Fig. 2

Impact of capital mobility on taxation: net capital importer ($\overline{k}=13$) Note: The horizontal axis represents different values of ${\varphi }_K$. Source: Model simulations

Fig. 3

Impact of labor mobility on taxation: net capital exporter ($\overline{k}=16$) Note: The horizontal axis represents different values of ${\varphi }_L$. Source: Model simulations

Fig. 4

Impact of labor mobility on taxation: net capital importer ($\overline{k}=13$) Note: The horizontal axis represents different values of ${\varphi }_L$. Source: Model simulations

Fig. 5

De jure and de facto capital mobility: unweighted averages, 29 OECD countries Note: Country sample: see Footnote 21. Source: Chinn and Ito (2006) and International Monetary Fund databases

Fig. 6

De facto capital and labor mobility: Unweighted averages for 29 OECD countries (100 in 1997) Note: Capital mobility is the sum of total assets and liabilities in percent of GDP (Source: International Monetary Fund). Labor mobility is the ratio of immigration to total population (Source: OECD migration database)

Fig. 7

Contributions to changes in capital taxation, 2003–2017 Source: Authors’ calculations based on Table 4, Column (3)

Fig. 8

Contributions to changes in labor taxation, 2003–2017 Source: Authors’ calculations based on Table 4, Column (7)

Fig. 9

Impact of labor mobility on taxation: net labor importer ($w^{\ast }=1$) Note: The horizontal axis represents different values of ${\varphi }_L$. Source: Model simulations