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Article

International Tax Competition in the Global Economy

Journal of Economic Integration. 2017. Vol. 32. No. 4. P. 883-913.

The study uses a Keynesian-type model of the global economy to investigate the impact of the rate of savings, the level of openness and population size on equilibrium tax rates and tax revenues in the world economy with direct and indirect taxation respectively. Within the model, the marginal propensity to consume is represented by a matrix specifying each country’s income distribution between internal consumption, exports and savings. The paper shows that equilibrium tax rates are higher in countries with a higher rate of savings, a greater level of openness and a smaller population size. If there is an infinitely large number of identical and highly-integrated competing countries, then the system with indirect taxation has a lower equilibrium tax rate and a higher tax revenue than the system with direct taxation. If a country with direct taxation and a country with indirect taxation compete, the latter gets a similar advantage.