Who benefits from tax competition in the European Union?
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This memo documents version 7 of the model, which is used in in Bettendorf et al. (2006). The first chapter documents the derivation of the equations. The calibration of the model is described in chapter 2. Section 1.1 derives the first-order conditions for consumption and labour supply from utility-maximising households. Section 1.2 derives from profit maximisation, the demand for labour, capital, location specific capital, intermediate inputs and financial assets for domestic and multinational firms. Taxes on corporate income, labour income, consumption and wealth are introduced when appropriate. The tax revenues have to meet the government expenditures on consumption, transfers and debt, see section 1.3. The market equilibria and the linkages with the Rest of the World are presented in section 1.4. Section 1.5 presents the solution procedure. Notation follows some simple rules. Upper case symbols are used for aggregated values whereas lower case characters are reserved for per capita variables (in terms of the young generation in the country of origin). In the case of variables with two dimensions, the first index refers to the country which owns the resource (residence), whereas the second index denotes the using country (destination). Time subscripts and country indices are dropped in the exposition whenever this is possible. The rates of return on bonds ( ˆ rwb) and equities ( ˆ rwe) are assumed fixed. The considered countries are small in the sense that they can import (or export) capital from the Rest of the World (ROW) without affecting the world interest rates. In other words, the net supply of capital by the ROW is perfectly elastic. Multinationals are assumed to operate only in the other ‘small’ countries, but not in the ROW (and vice versa). The ROW block does not need to be fully modelled. International capital and good flows are restricted by the current account for each country.
- tax rate