Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tax Harmonization versus Tax Competition in Europe: A Game Theoretical Approach


Author Info

  • André Fourçans

    (ESSEC Business School)

  • Thierry Warin

    (CREFE and CIRANO)


The purpose of this paper is to use a game theoretical approach to analyze tax harmonization, or competition, in a monetary union, more specifically in Europe. Without harmonization, free-riding behaviors may appear, leading to a sub-optimal tax equilibrium. Tax competition may also create budgetary problems and the objective of a balanced budget may not be attained. But national tax autonomy has one main advantage: as monetary policy is 'federalized', and as fiscal policy is constrained by the Stability and Growth Pact, taxation becomes the last macroeconomic instrument within governments' hands to deal with asymmetric shocks. The literature often condemns tax autonomy because of possible free-riding behaviors. In such a case, the competition could conduct to the lowest tax rate of all countries, condemning others to diminish their public spending. But, this analysis rests on a static point of view: In that case, harmonization with strict rules is Pareto-optimum. In the dynamic case, as harmonization costs are not incurred, the final equilibrium may be of a higher welfare level. Coordination would occur without the need for strict rules. If countries maintain sound public finance, tax competition would not lead to a 'race to the bottom'. L'objet de ce papier est d'utiliser une approche en terme de théorie des jeux afin d'étudier les questions d'harmonisation ou de compétition fiscale au sein d'une union monétaire. Plus spécifiquement, cette étude concerne l'Union économique et monétaire et le risque de « guerre d'usure ». Les arguments traditionnels sont d'une part que sans harmonisation, des comportements de « free-riding » peuvent apparaître, menant à un équilibre sous optimal en matière de politique fiscale, et d'autre part que la compétition peut aussi être à l'origine de problèmes importants en matière d'équilibre budgétaire. Mais l'autonomie fiscale a un avantage majeur. Lorsque la politique monétaire n'est plus du ressort des pays et lorsque la politique budgétaire est contrainte par le Pacte de stabilité et de croissance, l'instrument fiscal devient le dernier outil macro-économique à la disposition des gouvernements pour absorber les chocs asymétriques. Le modèle proposé est construit sous deux horizons. Si l’horizon est fini, les conclusions traditionnelles de la littérature en faveur de l'harmonisation sont représentées. Avec un horizon infini, les joueurs prennent en compte les coûts de dévier et d'entrer dans une guerre d'usure. La coordination apparaît alors sans qu'il y ait besoin d'un mécanisme institutionnel pour la forcer.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Our checks indicate that this address may not be valid because: 500 Internal Server Error ( [301 Moved Permanently]--> [301 Moved Permanently]--> If this is indeed the case, please notify (Stéphane Pallage)
File Function: Main text
Download Restriction: no

Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 132.

as in new window
Length: 20 pages
Date of creation: Apr 2001
Date of revision:
Handle: RePEc:cre:crefwp:132

Contact details of provider:
Postal: P.O. Box 8888, Downtown Station, Montreal (Canada) Quebec, H3C 3P8
Phone: (514) 987-6181
Fax: (514) 987-8494
Web page:
More information through EDIRC

Related research

Keywords: Monetary union; Economic integration; Tax competition; Tax harmonization; Fiscal competition;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
  2. Persson, Torsten & Tabellini, Guido, 1991. "The Politics of 1992: Fiscal Policy and European Integration," CEPR Discussion Papers 501, C.E.P.R. Discussion Papers.
  3. LOPEZ, Salvador & MARCHAND, Maurice & PESTIEAU, Pierre, 1996. "A Simple Two-Country Model of Redistributive Capital Income Taxation," CORE Discussion Papers 1996025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Holmlund, B. & Kolm, A.-S., 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Papers 1999:7, Uppsala - Working Paper Series.
  5. Marco Espinosa & Chong K. Yip, 1991. "On the sustainability of international coordination," Working Paper 91-3, Federal Reserve Bank of Atlanta.
  6. 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.
  7. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  8. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  9. Alfons Weichenrieder, 1996. "Fighting international tax avoidance," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 37-58, February.
  10. Wilson, John Douglas, 1987. "Trade, Capital Mobility, and Tax Competition," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 835-56, August.
  11. repec:fth:louvco:9625 is not listed on IDEAS
  12. Ypersele, T.P.M.C. van, 1998. "Coordination of Capital Taxation Among a Large Number of Asymmetric Countries," Discussion Paper 1998-137, Tilburg University, Center for Economic Research.
  13. Alfred Boss, 1999. "Do We Need Tax Harmonization in the EU?," Kiel Working Papers 916, Kiel Institute for the World Economy.
  14. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-22, July.
  15. Wildasin, David, 1993. "Fiscal competition and interindustry trade," Regional Science and Urban Economics, Elsevier, vol. 23(3), pages 369-399, July.
  16. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
Full references (including those not matched with items on IDEAS)


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Libman, Alexander, 2005. "Взаимодействие Государственных И Частных Структур В Интеграционных Группировах: Теоретические Подходы И Оп," MPRA Paper 17044, University Library of Munich, Germany.
  2. Sharma, Chanchal Kumar, 2011. "Multilevel Fiscal Governance in a Balanced Policy Environment," MPRA Paper 30282, University Library of Munich, Germany.
  3. Killian J. McCarthy & Frederik van Doorn & B. Unger, 2008. "Globalisation, Tax Competition and the Harmonisation of Corporate Tax Rates in Europe: A Case of Killing the Patient to Cure the Disease?," Working Papers 08-13, Utrecht School of Economics.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:cre:crefwp:132. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stéphane Pallage).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.