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Partial Harmonization of Corporate Taxes in an Asymmetric Repeated Game Setting

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  • Jun-ichi Itaya
  • Makoto Okamura
  • Chikara Yamaguchi
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    Abstract

    This paper investigates the conditions under which partial harmonization for capital taxation is sustained in a repeated interactions model of tax competition when there are three heterogenous countries with respect to their capital endowments. We show that regardless of the structure of the coalition (i.e., any group of countries), whether partial tax harmonization is sustainable or not crucially depends on the capital endowment of the median country relative to those of the large and small countries. The most noteworthy finding is that the closer the capital endowment of the median country to the average capital endowment of the large and small countries, the less likely is the tax harmonization including the median country to prevail and the more likely is the partial tax harmonization excluding the median country to prevail.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3240.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3240.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3240

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    Related research

    Keywords: tax coordination; asymmetric countries; repeated game; tax competition;

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    References

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    1. Burbidge, John B. & James A. DePater & Gordon M. Meyers & Abhijit Sengupta, 1997. "A Coalition-Formation Approach to Equilibrium Federations and Trading Blocs," American Economic Review, American Economic Association, vol. 87(5), pages 940-56, December.
    2. Cardarelli, R. & Taugourdeau, E. & Vidal, J.-P., 1999. "A Repeated Interactions Model of Tax Competition," G.R.E.Q.A.M. 99a34, Universite Aix-Marseille III.
    3. Peralta, Susana & van Ypersele, Tanguy, 2006. "Coordination of capital taxation among asymmetric countries," Regional Science and Urban Economics, Elsevier, vol. 36(6), pages 708-726, November.
    4. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
    5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    6. Itaya, Jun-ichi & Okamura, Makoto & Yamaguchi, Chikara, 2008. "Are regional asymmetries detrimental to tax coordination in a repeated game setting?," Journal of Public Economics, Elsevier, vol. 92(12), pages 2403-2411, December.
    7. Catenaro, Marco & Vidal, Jean-Pierre, 2003. "Implicit tax co-ordination under repeated policy interactions," Working Paper Series 0259, European Central Bank.
    8. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
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