International Tax Competition and Coordination

The Max Planck Institute for Tax Law and Public Finance has the working paper International Tax Competition and Coordination.

This paper aims to provide a comprehensive survey of the theory of international tax competition. Starting with the standard framework, it visits the non-cooperative equilibrium of tax competition, analyses aspects of partial and regional coordination, repeated interaction, stock-flow-effects, agglomeration effects and time consistency issues in dynamic models. We discuss profit shifting in the Keen-Kanbur model an d then survey frameworks to analyze countries’ bidding for firms, tax rate differentiat ion and preferential tax regimes, the role of information exchange and recent work on tax havens. The paper also discusses approaches that replace the benevolent government assumption b y selfish (Leviathan) governments or by political processes that determine countries’ decis ions on their tax policy in an international context.

I have just started to read this paper. What got me interested was the knowledge of one of the truths mentioned near the beginning of the paper.

It is over the last two decades or so, however, that increased economic integration has made international considerations a central component of tax policy making around the world. Like it or not, national tax policy makers are involved in a game with one another. This class of games is what is meant here by “international tax competition,” and it is the aim of this chapter to take stock of what is known of this game, the outcomes it may lead to, and the ways in which it might be beneficially reshaped.

If you are not a policy wonk, you are probably unaware of this issue, let alone how important it is to how we are governed and taxed. I suspect George W. Bush was told how important this is so that he would pull us out of coordination talks as soon as he came into office. Coordination would have ended the games companies play.

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