This paper uses a game-theoretic approach to analyze the taxation of interest income in Europe in the presence of tax evasion. The model allows the authors to assess the success of various reform proposals. They argue that the tax treatment of nonresidents' interest income plays a crucial role. When decisions on discrimination and on withholding tax rates are made noncooperatively, the outcome is similar to a prisoners dilemma. All countries discriminate but, in equilibrium, internationally mobile portfolio capital evades taxation successfully. In contrast, if all governments did not discriminate, tax competition leads to less tax evasion.
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Volume (Year): 109 (1999) Issue (Month): 452 (January) Pages: 93-101 Download reference. The following formats are available: HTML
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