Capital Tax Competition: Is There A Gain from Monetary Integration?

We show that monetary integration may result in higher capital taxes. The reason is that taxation of mobile capital in a common currency area may give rise to a vertical externality by shrinking the revenues of the anchor central bank from issuing the common currency. As mobility of tax bases, like capital, gives also rise to horizontal tax inefficiencies, the question arises as to whether instituting a common currency area can be viewed as an efficiency improving arrangement. We argue that this will depend on whether taxes were too low or too high prior to monetary integration, with the latter depending on characteristics of money demand, elasticity of capital, extend of taxation of immobile factors, and size of seignorage and total tax receipts.