Is Partial Tax Harmonization Desirable?

Paola Conconi (), Carlo Perroni and Raymond G. Riezman

No 5761, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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. Our analysis provides a rationale for the proposed creation of an Enhanced Cooperation Agreement on capital taxes within the European Union.

Keywords: commitment; partial coordination; tax competition (search for similar items in EconPapers)
JEL-codes: C73 F21 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-pbe and nep-pub
Date: Written
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Related works:
Working Paper: Is Partial Tax Harmonization Desirable? (2007)
Journal Article: Is partial tax harmonization desirable (2008)
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