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Tax Competition and Information Sharing in Europe: A Signaling Game

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  • Thierry Warin

    ()

  • André Fourçans

Abstract

This paper provides a challenging view to the tax harmonization issue. The literature often proposes tax harmonization to avoid free-riding behaviors in free-trade areas, and more particularly in monetary unions. Countries may decrease their tax rates in order to develop tax competitive advantage and attract capital. Without tax harmonization, tax autonomy may lead to a “race to the bottom.” The model proposed here uses a game-theoretical approach to analyze this question. It shows that tax competition may lead to stability. The mechanism leading to this outcome rests upon the impact of the signal given by both players. If a country gives the signal that “friendly” taxation behavior is not its priority, the result can be a “race to the bottom”. Conversely, if both countries signal their ability to conduct such a war, this war will not occur, and the stability of the system will be ensured.

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Bibliographic Info

Paper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0605.

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Length: 13 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:mdl:mdlpap:0605

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

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References

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  1. Cardarelli, R. & Taugourdeau, E. & Vidal, J.-P., 1999. "A Repeated Interactions Model of Tax Competition," Papiers d'Economie Mathématique et Applications 1999.73, Université Panthéon-Sorbonne (Paris 1).
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  8. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer, vol. 10(3), pages 259-80, May.
  9. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
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  12. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  13. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  14. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
  15. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Thierry Warin & Robert E. Prasch, 2013. "Systemic Risk in the Financial Industry: “Mimetism” for the Best and for the Worst," CIRANO Working Papers 2013s-29, CIRANO.

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