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Is Targeted Tax Competition Less Harmful than its Remedies?

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  • Eckhard Janeba
  • Michael Smart

Abstract

Some governments have recently called for international accords restricting the use of preferential taxes targeted to attract mobile tax bases from abroad. Are such agreements likely to discourage tax competition or conversely cause it to spread? We study a general model of competition for multiple tax bases and establish conditions for a restriction on preferential regimes to increase or decrease tax revenues. Our results show that restrictions are most likely to be desirable when tax bases are on average highly responsive to a coordinated increase in tax rates by all governments, and when tax bases with large domestic elasticities are also more mobile internationally. Our analysis allows us to reconcile the apparently contradictory results, derived from analyzing special cases, of the previous literature.

Suggested Citation

  • Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo.
    • Handle: RePEc:ces:ceswps:_590
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    References listed on IDEAS

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    1. Dhillon, Amrita & Perroni, Carlo & Scharf, Kimberley A., 1999. "Implementing tax coordination," Journal of Public Economics, Elsevier, vol. 72(2), pages 243-268, May.
    2. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    3. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
    4. Peter Birch Sørensen, 2000. "The case for international tax co-ordination reconsidered," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(31), pages 430-472.
    5. Ralph A. Winter, 1997. "Colluding on Relative Prices," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 359-371, Summer.
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