This paper addresses the question of the likelihood of a race to the bottom in a monetary union, like the Euro-zone, that could result from tax competition between countries. This fear of a race to the bottom is used both in the economic literature and the political arena to promote tax harmonization. Using a game theoretical approach with the costs of changing tax policies to analyze the conditions of a race to the bottom, this paper shows that countries may not choose such an extreme strategy. In other words, the extreme case scenario of a race to the bottom is unlikely, and proponents of tax harmonization should base their reasoning upon other assumptions.
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Find related papers by JEL classification: H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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