This paper incorporates the inﬂuence of interest groups into the asymmetric tax competition model to explain the phenomenon that small countries do not necessarily set lower capital tax rates than large countries. In addition to the effciency effect considered by the standard model, which leads the smaller country to
set a lower capital tax rate, this present paper also takes account of the political effect arising from lobbying. We show that the smaller country may face less downward political pressure. If the political effect outweighs the efﬁciency effect, then the smaller country sets a higher tax rate than the larger country. This result has several welfare implications, which are in contrast to the conventional consequences.