Strategic capital tax competition: a pecuniary externality and a corrective device

A second source of inefficiency exists in capital tax competition models with asymmetric non-price-taking jurisdictions. This inefficiency is unlike that identified by D.E. Wildasin, which takes place in a price-taking environment. The newly determined inefficiency is set off when a jurisdiction raises its capital taxation. In this manner, it cuts the equilibrium capital price, eventually damaging the condition of other jurisdictions' residents, without giving consideration to these external impacts in its decision making. To attain an efficient allocation, this pecuniary externality should be corrected with a device that both corrects for the fiscal externality identified by Wildasin and addresses each jurisdiction with a distinct component that serves as the Pigovian correction for the pecuniary externality.