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Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View

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  • Thierry Warin

    ()

  • André Fourçans

Abstract

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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File URL: http://www.middlebury.edu/services/econ/repec/mdl/ancoec/0604.pdf
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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0604.

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Length: 23 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0604

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Related research

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

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  1. LOPEZ, Salvador & MARCHAND, Maurice & PESTIEAU, Pierre, . "A simple two-country model of redistributive capital income taxation," CORE Discussion Papers RP -1411, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  3. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  4. Persson, Torsten & Tabellini, Guido, 1995. "Double-edged incentives: Institutions and policy coordination," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 38, pages 1973-2030 Elsevier.
  5. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262201119, December.
  6. Mendoza, Enrique G. & Tesar, Linda L., 2005. "Why hasn't tax competition triggered a race to the bottom? Some quantitative lessons from the EU," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 163-204, January.
  7. Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahrèche-Revil, 2000. "Foreign Direct Investment and the Prospects for Tax Co-Ordination in Europe," Working Papers 2000-06, CEPII research center.
  8. Assaf Razin & Efraim Sadka, 1991. "International Tax Competition and Gains from Tax Harmonization," NBER Working Papers 3152, National Bureau of Economic Research, Inc.
  9. repec:fth:louvco:9625 is not listed on IDEAS
  10. Rodrik, D. & Ypersele, T.P.M.C. van, 1999. "When does International Capital Mobility Require Tax Coordination?," Discussion Paper 1999-27, Tilburg University, Center for Economic Research.
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