Tax Competition vs. Tax Harmonisation in a Dynamic World Economy

Abstract

In the context of a stylised game theoretical framework of capital tax competition, we show that when repeated policy interactions are associated to a systematic punishment of the deviating policymaker, a co-ordinated outcome can be the solution to the non co-operative tax game. This result suggests that explicit forms of policy co-ordination, such as a centralised tax authority, could in fact be largely unnecessary. However, some explicit co-ordination may continue to be desirable to avoid the pitfalls of tax competition by smaller economies, which benefit most from non co-ordinated strategies.

Keywords: Tax Competition, Tax Harmonisation

JEL Classification: H87