Essays in economics of taxation

Xuejun Wang, Purdue University

Abstract

In essay one, we examine nonlocalized competition in interest taxation between an arbitrary number of countries. Our focus is on the role of relative number of locked-in investors in asymmetric tax competition. We find that in equilibrium, small countries have advantages in tax competition. In particular, the smallest country will undercut all other countries. This implies that "tax heavens" will be small countries. Comparative statics are also carried out to see how the equilibrium outcomes change with parameters in these models. Finally, we also have a brief discussion of collusion. In essay two, we utilize techniques from essay one to explore another aspect of tax competition: the comparison of nonlocalized and localized tax competition. First, we look at two symmetric models: the adapted Varian model and Banerjee and Kovenock's (1995) localized circle model. We come to the unconventional result that the localized model might be more competitive than the nonlocalized model. Then, we consider a class of symmetric localized models to see how robust this result is. Finally, with a small marginal cost, we look at two asymmetric models to see if the result from the symmetric cases can be carried over. With a simple assumption on the cost function, an earlier published article shows that an increase in a profit tax will increase the production of joint products. Essay three provides a complement to that work by considering an alternative method of cost allocation. The previous result still holds in our framework with some additional assumptions on the demand function. Essay four examines one of the financial aspects of tax evasion. In particular, we show how tax evasion affects the excess rate of return (the difference between the expected rate of return and the riskless rate of return). Introducing a simple assumption about tax evasion in a continuous-time portfolio choice model, we find that the excess rate of return will decrease with the extent of undetected tax evasion at a decelerating rate under progressive taxation.

Degree

Ph.D.

Advisors

Moore, Purdue University.

Subject Area

Finance|Economic theory

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