Is partial tax harmonization desirable?

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 bee...

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Bibliographic Details
Published inJournal of public economics Vol. 92; no. 1; pp. 254 - 267
Main Authors Conconi, Paola, Perroni, Carlo, Riezman, Raymond
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.02.2008
Elsevier
SeriesJournal of Public Economics
Subjects
Commitment
Harmonization
Optimal taxation
Partial coordination
Public finance
Tax competition
Tax systems
Commitment
F21
Partial coordination
H21
C73
Tax competition
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Summary: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.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0047-2727
1879-2316
DOI:10.1016/j.jpubeco.2007.03.010