On the Desirability of Tax Coordination When Countries Compete in Taxes and Infrastructure

30 Pages Posted: 6 Jul 2013

See all articles by Yutao Han

Yutao Han

Universite du Luxembourg

Patrice Pieretti

Universite du Luxembourg; Centre de Recherche en Économie Appliquée (CREA)

Benteng Zou

Centre de Recherche en Économie Appliquée (CREA)

Multiple version iconThere are 3 versions of this paper

Date Written: March 31, 2013

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.

Keywords: Tax competition, infrastructure, tax coordination, tax revenue, social welfare

JEL Classification: H21, H87, H73, F21, C72

Suggested Citation

Han, Yutao and Pieretti, Patrice and Zou, Benteng, On the Desirability of Tax Coordination When Countries Compete in Taxes and Infrastructure (March 31, 2013). Institute of Mathematical Economics Working Paper No. 476, Available at SSRN: https://ssrn.com/abstract=2289956 or http://dx.doi.org/10.2139/ssrn.2289956

Yutao Han

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Patrice Pieretti

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

Benteng Zou (Contact Author)

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

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