Tax Coordination with Different Preferences for Public Goods: Conflict or Harmony of Interest?

The paper analyzes strategic commodity taxation in a model with trade in a single private good that is simultaneously imported by consumers of a high-tax country and exported by its producers. Conditions for the existence of a Nash equilibrium are given, and an asymmetry is introduced through different preferences for public goods. Two tax coordination measures are discussed - a minimum tax rate and a coordinated increase in the costs of cross-border shopping. It is shown that tax coordination generally benefits the high-tax country while the low-tax country will gain only if the intensity of tax competition is high in the initial equilibrium or if governments are price-sensitive toward the effective marginal costs of public good supply.