Implementing Partial Tax Harmonization in an Asymmetric Tax Competition Game with Repeated Interaction

35 Pages Posted: 7 May 2015

See all articles by Jun-ichi Itaya

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management

Makoto Okamura

Hiroshima University - Economics

Chikara Yamaguchi

Hiroshima University

Date Written: April 29, 2015

Abstract

This paper investigates the conditions under which partial harmonization for capital taxation is sustained in a repeated interactions model of tax competition when there are three countries with heterogenous capital endowments. We show that regardless of the structure of the coalition (i.e. full or partial tax coordination), whether partial tax harmonization is sustainable or not crucially depends on the extent to which the capital endowment of the medium-sized country is similar to that of the large or small country. The most noteworthy finding is that the closer the capital endowment of the median country is to the average one, the less likely the tax harmonization including the median country is to prevail and the more likely the partial tax harmonization excluding the median country is to prevail. We also show that partial tax harmonization makes the member countries of the tax union better off and non-member countries worse off, which stands in shape contrast with previous studies such as Konrad and Schjelderup (1999) and Bucovetsky (2009).

Keywords: tax coordination, asymmetric countries, repeated game, tax competition

JEL Classification: H730, F590, F210

Suggested Citation

Itaya, Jun-ichi and Okamura, Makoto and Yamaguchi, Chikara, Implementing Partial Tax Harmonization in an Asymmetric Tax Competition Game with Repeated Interaction (April 29, 2015). CESifo Working Paper Series No. 5312. Available at SSRN: https://ssrn.com/abstract=2603171

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management ( email )

Sapporo 060-0809
Japan

Makoto Okamura

Hiroshima University - Economics ( email )

1-2-1 Kagamiyama
Higashi-Hiroshima
Japan

Chikara Yamaguchi (Contact Author)

Hiroshima University ( email )

1-2-1
Kagamiyama
Higashi-Hiroshima, Hiroshima 739-8525
Japan

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