This study examines a two-country tax competition model,in which the capital endowment and income inequality are asymmetric in eachcountry. Hwang and Cheo [1] and Peralta and van Ypersele [2] show that whencountries differ in capital endowments, the country with the higher capitalendowment sets a lower capital tax rate. However, their studies assume that allinhabitants are homogeneous. We extend the models of the two aforementionedstudies and conduct an analysis taking into account the asymmetry in incomeinequality within countries. The tax rate is set by the policy maker elected bymajority voting in each country’s election. We find that a higher tax rate maybe set in the country with higher capital endowment under certain conditions.Further, if the income inequality is sufficiently large, the median voters ineach country unambiguously delegate the right to decide the tax rate toresidents who prefer a higher tax rate than their own, regardless of thecapital endowments of the two countries.
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