Fiscal Competition versus Fiscal Harmonization: A Review of the Arguments

A substantial theoretical and empirical literature has developed to addresses the advantages and perils of tax competition and how far it may be desirable to advance tax harmonization. The basic idea of the early literature was that internationally mobile capital moves from countries with higher rates of corporate taxation to lower rate countries. This limits the ability of the governments to tax capital and tend to reduce tax revenue of the government. Subsequent research has extended the basic model of tax competition by incorporating several important facets and qualifications to better reflect the real world. These studies have reached conclusions which are either starkly different from the early literature or have added important qualification to those. The principle theme of these new conclusions is that tax competition need not be as harmful as portrayed earlier. In the article we survey the extant theoretical literature on tax competition and tax harmonization and try to understand what lessons policy makers can learn from it.