ABSTRACT
This chapter offers some basic insights into the problem by studying conditions for the tax system to exhibit competitive neutrality in a conventional model of international trade and capital movements. The taxes studied are an ideal valueadded tax and an income tax with alternative depreciation provisions. The chapter discusses a formal framework of the discussion is specified and a definition for tax neutrality is given. It describes the role of taxation in determining market equilibria. Corporate and personal income tax rates are being reduced in many countries, and there is growing concern that countries which retain high tax rates will suffer because of increased mobility of goods and production factors. A tax cut that stimulates domestic savings may induce capital exports and thus improve a country's competitiveness via a devaluation. Perfect specialization and a dramatic change in international competitiveness result regardless of whether the overall tax burden imposed on French and German firms is the same.
