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Is Partial Tax Harmonization Desirable?

  • Paola Conconi
  • Paola Riezman
  • Carlo Perroni

We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/98550.

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Date of creation: 2008
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Publication status: Published in: Journal of public economics (2008) v.92,p.254-267
Handle: RePEc:ulb:ulbeco:2013/98550
Note: SCOPUS: ar.j
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