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On the desirability of tax coordination when countries compete in taxes and infrastructures

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  • Yutao Han

    ()
    (CREA, University of Luxembourg)

  • Patrice Pieretti

    (CREA, University of Luxembourg)

  • Benteng Zou

    (CREA, University of Luxembourg)

Abstract

In our paper we show that when countries compete in taxes and infrastructures, coordination through a uniform tax rate or a minimum rate does not necessarily create the welfare effects observed under pure tax competition. The divergence is even worse when the competing jurisdictions differ in the quality of their institutions. If tax revenue is used to gauge the desirability of coordination, our model shows that imposing a uniform tax rate is Pareto-inferior to the non cooperative equilibrium when countries compete in taxes and infrastructures. This result is completely reversed with pure tax competition if countries are not too uneven in size. If a minimum tax rate lying between those resulting from the non-cooperative equilibrium is set, the low tax country will never be better off. Finally the paper shows that the potential social welfare gains from tax harmonization crucially depend on how heterogeneous the competing countries are.

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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-02.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-02

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Keywords: Tax competition; infrastructures; tax coordination; tax revenue; social welfare;

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