Is Tax Harmonization Useful?

Abstract

It is a widely acknowledged result of the literature on international tax competition that an inefficient provision of public goods can only be avoided, if taxes are sufficiently coordinated. In this paper we use a model where governments use commodity and factor taxes in the tax competition game. We show that governments will always choose a second-best efficient tax structure in the Nash equilibrium if they have access to a residence-based capital tax and either a destination-based commodity tax or a labor tax. Moreover, we show that tax competition need not foreclose third-best efficiency in a world with a restricted tax policy toolkit.

Keywords: International taxation, tax interaction, constrained efficiency