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Is Tax Policy Coordination Necessary?

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  • Kollintzas, Tryphon
  • Philippopoulos, Apostolis
  • Vassilatos, Vanghelis

Abstract

The answer to this question is "yes". We re-examine noncooperative and cooperative equilibria under perfect capital mobility. To this end, we develop a two-country optimal growth model with endogenous national fiscal policies. The channel for interdependence is distortionary income taxes. We study both the Residence and Source principle of international taxation. National governments play Stackelberg vis-à-vis private agents, while they can play either Nash or cooperate vis-à-vis each other. We solve for Markov-perfect (time consistent) equilibria. We show that the pertinent Nash equilibria are degenerate. Thus, under both the Residence and Source principle, only cooperative equilibria can exist. The driving force is perfect capital mobility. This is a new result that provides a strong argument for world tax coordination. When we solve for cooperative equilibria, we show that it is optimal to set a common tax rate across countries, irrespective of the principle of international taxation (Residence or Source) and differences across countries. A cooperative solution under the Source principle may be more difficult to implement than under the Residence principle.

Suggested Citation

  • Kollintzas, Tryphon & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 2000. "Is Tax Policy Coordination Necessary?," CEPR Discussion Papers 2348, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2348
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    References listed on IDEAS

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    Cited by:

    1. Frode Brevik & Manfred Gärtner, 2006. "Macroeconomic effects of banking secrecy when tax evasion is endogenous," University of St. Gallen Department of Economics working paper series 2006 2006-10, Department of Economics, University of St. Gallen.
    2. Frode Brevik & Manfred Gärtner, 2008. "Can tax evasion tame Leviathan governments?," Public Choice, Springer, vol. 136(1), pages 103-122, July.
    3. Malley, Jim & Philippopoulos, Apostolis & Economides, George, 2002. "Testing for tax smoothing in a general equilibrium model of growth," European Journal of Political Economy, Elsevier, vol. 18(2), pages 301-315, June.
    4. Jim Malley & Apostolis Philippopoulos, 1999. "Economic Growth And Endogenous Fiscal Policy: In Search Of A Data Consistent General Equilibrium Model," Working Papers 1999_18, Business School - Economics, University of Glasgow, revised Jan 1998.
    5. Frode Brevik & Manfred Gärtner, 2005. "Welfare and Distribution Effects of Bank Secrecy Laws," University of St. Gallen Department of Economics working paper series 2005 2005-07, Department of Economics, University of St. Gallen.
    6. George Economides & Apostolis Philippopoulos & Simon Price, 2002. "Elections, Fiscal Policy and Growth: Revisiting the Mechanism," CESifo Working Paper Series 691, CESifo Group Munich.
    7. Jim Malley & Apostolis Philippopoulos, 1999. "A note on testing for tax-smoothing in general equilibrium," Working Papers 1999_17, Business School - Economics, University of Glasgow.

    More about this item

    Keywords

    Markov-Perfect Equilibrium; Optimal Taxation; Residence And Source Principle; Tax Coordination;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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