Can Tax Coordination Work?

A large part of the literature on tax competition argues that capital tends to be undertaxed if there is no international coordination of tax policies. This result constitutes an important theoretical basis for practical tax policy in particular in the EU, where minimum tax rates have been proposed for corporate taxation and withholding taxes on interest income. This paper shows that coordination arrangements of the type currently discussed in the EU face the problem that national governments have incentives to neutralise coordinated tax increases or minimum rates by adjusting tax instruments not covered by the agreement. Capital tax coordination will therefore only be effective if it takes into account the interaction between all available tax instruments that affect the cost of capital.