Miltiadis Makris on Anticipated Capital Market Integration May Lead to a "Race to the Top"

We investigate non-cooperative capital taxes when it is rationally 
anticipated that capital will be mobile across tax jurisdictions in 
the future. This problem has not been investigated before in spite 
of its importance and relevance for emerging economies and the 
ongoing economic integration in Europe and elsewhere. Our study 
emphasizes that capital taxes that are levied prior to capital 
market integration (CMI) taking place affect, among others, capital 
stocks and tax revenues in other tax jurisdictions after CMI has 
occurred. This gives rise to an intertemporal tax externality, which 
may lead, ceteris paribus, to too high non-cooperative capital taxes 
prior to CMI. This neglected intertemporal externality arises from 
the effects of capital taxes on private income and, thereby, on 
savings and aggregate supply of capital over time, for any given 
path of net real interest rates and future incomes. Our study could 
contribute to the further understanding of capital taxes in the last 
few decades when there has been an ongoing process of CMI worldwide.