A Baseline Model of Tax Cooperation

Abstract

In this chapter, a simple model of tax cooperation is developed. The basic model is not meant to capture all the relevant characteristics of international tax policy; instead, the intention is to develop first predictions about countries’ strategic concerns in international tax policy. I first discuss why single taxation is the collectively optimal choice. Then I consider to what extent it is also individually rational for a government to pursue a policy of single taxation. Achieving single taxation involves the avoidance of both over- and under-taxation of international income. I first derive the strategic structure for avoiding over-taxation and then turn to under-taxation. As will be shown, both issues involve different kinds of collective action problems. From the close analysis of the strategic structures, I derive hypotheses on the institutional design that may help to overcome the respective problems of collective action. Finally, I consider the issue of institutional development over time and derive hypotheses on the expected institutional trajectory of the tax regime.