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Is Partial Tax Harmonization Desirable?

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Author Info
Conconi, Paola
Perroni, Carlo
Riezman, Raymond

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Abstract

We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization. Our analysis provides a rationale for the proposed creation of an Enhanced Cooperation Agreement on capital taxes within the European Union.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5761.

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Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5761

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Related research
Keywords: commitment partial coordination tax competition

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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