Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View

Thierry Warin and Andre Fourcans ()

Middlebury College Working Paper Series from Middlebury College, Department of Economics

Abstract: This paper addresses the question of the likelihood of a race to the bottom in a monetary union, like the Euro-zone, that could result from tax competition between countries. This fear of a race to the bottom is used both in the economic literature and the political arena to promote tax harmonization. Using a game theoretical approach with the costs of changing tax policies to analyze the conditions of a race to the bottom, this paper shows that countries may not choose such an extreme strategy. In other words, the extreme case scenario of a race to the bottom is unlikely, and proponents of tax harmonization should base their reasoning upon other assumptions.

Keywords: Monetary union; Economic integration; Tax competition; Tax harmonization; Fiscal competition (search for similar items in EconPapers)
JEL-codes: H20 H26 H77 H87 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006-03
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:mdl:mdlpap:0604

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