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Abstract

The paper reviews the theoretical literature on capital tax competition relevant for capital taxation in the European Union. The basic tax competition model a la Zodrow and Mierzkowski (1986) is presented, and the arguments of the literature are subsequently integrated into the framework of the basic tax competition model. The review includes models of tax competition where countries are assumed large, asymmetric, when there are more than one tax instrument, where there are more than one tax base, when government is assumed selfserving, and where democratic elections and political equilibrium are allowed for. Moreover, the consequences of agglomeration economies for tax competition pressures are reviewed and incorporated into the standard tax competition model.

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