The Welfare Effects of a Minimum Tax and Tax Competition
Tax administration is costly and may discourage some governments from utilizing certain taxes, thus becoming tax havens on those particular tax bases. This paper studies the welfare implications of strategic tax setting in the presence of such zero-tax jurisdictions. We develop a tax competition model in which jurisdictions decide whether or not to levy a tax and decide the optimal tax rate to compete for mobile factors. We apply our model to U.S. county sales taxes where 40% of jurisdictions do not levy a sales tax. We investigate the welfare effect of introducing a minimum tax that would require all zero-tax jurisdictions to set a positive tax rate, taking into account the endogenous response of the taxing jurisdictions.