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

  • Yutao Han

    (CREA, Université du Luxembourg)

  • Patrice Pieretti

    (CREA, Université du Luxembourg)

  • Benteng Zou


    (CREA, Université du Luxembourg)

In our paper, we demonstrate that when countries compete in taxes and infrastructure, 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 institutional quality. If tax revenues are used to gauge the desirability of coordination, our model demonstrates that imposing a uniform tax rate is Pareto-inferior to the non-cooperative equilibrium when countries compete in taxes and infrastructure. This result is completely reversed under pure tax competition if the countries are sufficiently similar in size. If a minimum tax rate is set within the range of those resulting from the non-cooperative equilibrium, the low tax country will never be better off. Finally, the paper demonstrates that the potential social welfare gains from tax harmonization crucially depend on the degree of heterogeneity among the competing countries.

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Paper provided by Center for Mathematical Economics, Bielefeld University in its series Center for Mathematical Economics Working Papers with number 476.

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Length: 30 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:bie:wpaper:476
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