Partial vs. Global Coordination of Capital Income Tax Policies

Coordination of tax policies among policy makers is an often considered remedy against inefficiently low taxes on mobile tax bases induced by tax competition. Tax coordination may, however, not be particularly successful if some countries do not take part in the coordination. The outcome of such "partial coordination" in capital income taxation is derived within a linear-quadratic tax competition model with imperfect capital mobility, and the results suggest that the critical mass of countries needed for partial coordination to matter significantly is likely to be a very large percentage of the economies of the world, with the main benefits accruing to countries not participating. This may call for implementation of a global capital income tax treaty administered along the lines of the WTO trade agreements.