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International Tax Competition: A Case for International Cooperation in Globalization

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  • John-ren Chen
  • Christian Smekal

Abstract

The liberalization of international financial flows and foreign direct investment has induced countries to use diverse measures to attract inflow of foreign capital and foreign direct investment, which is expected to have a positive effect on the growth of GDP and thus a positive effect on social welfare. Tax exemption, reduction of tax rate, tax holiday, or diverse subsidies are some of the most important measures used. In this paper we study international tax cooperation, i.e., countries change and especially reduce tax rate for corporate income or for asset revenues to attract inflow of foreign direct investment. Both theoretical and empirical studies have shown the sensibility of foreign direct investment decision with respect to tax rate differences between home countries and host countries. In general, more inflow of foreign direct investment can be expected if the tax rate of the home country is lower than that of foreign countries. This is the main reason for international tax cooperation. In this paper we propose a simple model to prove the sub-optimal Nash non cooperative solution in a two-country tax-competition game. The model shows that international tax cooperation can improve welfare of the participating countries. How to reach a cooperative solution for an international tax competition game (ITCG) is therefore an important issue for further discussions and studies. International institutions can play a crucial role to reach international tax cooperation or international tax harmonization. Copyright Springer-Verlag/Wien 2004

Suggested Citation

  • John-ren Chen & Christian Smekal, 2004. "International Tax Competition: A Case for International Cooperation in Globalization," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 11(3), pages 59-76, December.
    • Handle: RePEc:spr:trstrv:v:11:y:2004:i:3:p:59-76
    DOI: 10.1007/s11300-004-0005-0
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    Cited by:

    1. John-ren Chen, 2010. "Welfare Improvement through International Cooperation as Justification for International Institutions in Global Governance," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 17(4), pages 737-762, December.
    2. Maurice Odine, 2018. "Cross-Cultural Communication for Business in Era of Globalization," Studies in Media and Communication, Redfame publishing, vol. 6(1), pages 53-62, June.

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