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Enhanced Cooperation in an Asymmetric Model of Tax Competition

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  • Hendrik Vrijburg
  • Ruud A. De Mooij

Abstract

This paper analyzes enhanced cooperation agreements in corporate taxation in a three country tax competition model where countries differ in size. We characterize equilibrium tax rates and the optimal tax responses due to the formation of an enhanced cooperation agreement. Conditions for strategic complementarity or strategic substitutability of tax rates are crucial for the welfare effects of enhanced cooperation. Simulations show that enhanced cooperation is unlikely to be feasible for small countries. When enhanced cooperation is feasible, it may hamper global harmonization. Only when countries are of similar size is global harmonization a feasible outcome.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2915.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2915
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Keywords: tax coordination; asymmetry; enhanced cooperation agreements; strategic tax response;

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Find related papers by JEL classification:
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
  • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

References listed on IDEAS
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  1. Peter Sørensen, 2004. "Company Tax Reform in the European Union," International Tax and Public Finance, Springer, vol. 11(1), pages 91-115, January.
  2. Etro, Federico & Ageloni, Ignazio & Alesina, Alberto, 2005. "International Unions," Scholarly Articles 4553008, Harvard University Department of Economics.
  3. Leon Bettendorf & Albert van der Horst & Ruud A. de Mooij & Hendrik Vrijburg, 2010. "Corporate tax consolidation and enhanced coorporation in the European Union," Working Papers 1001, Oxford University Centre for Business Taxation.
  4. Jens Brøchner & Jesper Jensen & Patrik Svensson & Peter Birch Sørensen, 2006. "The Dilemmas of Tax Coordination in the Enlarged European Union," CESifo Working Paper Series 1859, CESifo Group Munich.
  5. Peter Birch Sørensen, 2000. "The case for international tax co-ordination reconsidered," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 429-472, October.
  6. Bayindir-Upmann, Thorsten & Ziad, Abderrahmanne, 2005. "Existence of equilibria in a basic tax-competition model," Regional Science and Urban Economics, Elsevier, vol. 35(1), pages 1-22, January.
  7. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July.
  8. Jens Brøchner & Jesper Jensen & Patrik Svensson & Peter Birch Sørensen, 2006. "The Dilemmas of Tax Coordination in the Enlarged European Union," Working Papers 2006-11, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  9. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  10. Paola Manzini & Marco Mariotti, 1998. "A Tragedy Of The Clubs: Excess Entry in Exclusive Coalitions," Game Theory and Information 9808001, EconWPA.
  11. Massimo Bordignon & Sandro Brusco, 2003. "On Enhanced Cooperation," CESifo Working Paper Series 996, CESifo Group Munich.
  12. Paul Beaudry & Pierre Cahuc & Hubert Kempf, 1999. "Is it Harmful to Allow partial Cooperation ?," Working Papers 99-39, Centre de Recherche en Economie et Statistique.
  13. John B. Burbidge & James A. DePater & Gordon M. Myers & Abhijit Sengupta, 1996. "A Coalition-formation Approach to Equilibrium Federations and Trading Block s," Department of Economics Working Papers 1996-05, McMaster University.
  14. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
  15. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1533-1554, August.
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Cited by:

  1. Ruud A. de Mooij & Hendrik Vrijburg, 2012. "Tax Rates as Strategic Substitutes," Tinbergen Institute Discussion Papers 12-104/VI, Tinbergen Institute.
  2. Hendrik Vrijburg & Ruud A. Mooij, 2016. "Tax rates as strategic substitutes," International Tax and Public Finance, Springer, vol. 23(1), pages 2-24, February.
  3. Thomas Eichner & Rüdiger Pethig, 2013. "Self-Enforcing Capital Tax Coordination," CESifo Working Paper Series 4454, CESifo Group Munich.
  4. Buettner, Thiess & von Schwerin, Axel, 2016. "Yardstick competition and partial coordination: Exploring the empirical distribution of local business tax rates," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 178-201.
  5. Michael Keen & Kai A. Konrad, 2012. "International Tax Competition and Coordination," Working Papers international_tax_competi, Max Planck Institute for Tax Law and Public Finance.
  6. Sanz Córdoba, Patrícia & Theilen, Bernd, 1965-, 2016. "Partial tax harmonization through infrastructure coordination," Working Papers 2072/261535, Universitat Rovira i Virgili, Department of Economics.

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