Tax competition in the European Union

Tax competition poses two problems for international cooperation: defection and distributive conflict. Multilateral cooperation to stop tax competition may fail because states face incentives to renege on their promises or because they face adverse distributional consequences, either of which makes cooperation an unattractive option for them. Conventional wisdom in international relations concentrates on the first problem, highlighting that the problem of tax competition resembles a Prisoner's dilemma. We argue instead that it is the peculiar distributional consequences of tax competition which explain why all attempts to regulate it cooperatively have failed. Combining theoretical analysis with empirical research on the European Union's unsuccessful record of tax cooperation, we show how distributive, within-group conflict amongst potential cooperators interacts with the constraints imposed by a non-cooperating outside world to make multilateral tax cooperation an especially elusive goal for international collaboration.