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

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  • Han, Yutao

    (Center for Mathematical Economics, Bielefeld University)

  • Pieretti, Patrice

    (Center for Mathematical Economics, Bielefeld University)

  • Zou, Benteng

    (Center for Mathematical Economics, Bielefeld University)

Abstract

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.

Suggested Citation

  • Han, Yutao & Pieretti, Patrice & Zou, Benteng, 2014. "On the desirability of tax coordination when countries compete in taxes and infrastructure," Center for Mathematical Economics Working Papers 476, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:476
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    File URL: https://pub.uni-bielefeld.de/download/2674047/2902034
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yutao Han & Patrice Pieretti & Benteng Zou, 2013. "The Dynamics of the Location of Firms – A Revisit of Home-Attachment under Tax Competition," CREA Discussion Paper Series 13-15, Center for Research in Economic Analysis, University of Luxembourg.
    2. Kate Hynes & Jie Ma & Cheng Yuan, 2017. "Transport Infrastructure Investments and Competition for FDI," Working Papers 201718, School of Economics, University College Dublin.
    3. Sanz Córdoba, Patricia & Theilen, Bernd, 1965-, 2017. "Strategic Responses to International Tax Competition: Fiscal (De) Centralization versus Partial Tax Harmonization," Working Papers 2072/306513, Universitat Rovira i Virgili, Department of Economics.
    4. Krishanu Karmakar & Jorge Martinez-Vazquez, 2014. "Fiscal Competition versus Fiscal Harmonization: A Review of the Arguments," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1431, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Sarah El Joueidi, 2017. "Self-Regulation and Stock Listing Decision of Banks," CREA Discussion Paper Series 17-05, Center for Research in Economic Analysis, University of Luxembourg.

    More about this item

    Keywords

    socialwelfare; Tax competition; infrastructure; tax revenue; tax coordination;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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