Abstract
This paper examines the tax competition literature and attempts to draw out its implications for the debate on corporate tax coordination within the EU. It begins with the early basic tax competition model, which derives conditions under which underprovision of public services occurs and tax harmonization unambiguously improves welfare for all states in the union. The paper then turns to a wide variety of extensions of this model, some of which reinforce its results and others that yield rather different conclusions. The analysis concludes by considering the implications of the tax competition literature for the debate on EU corporate tax coordination, drawing on some recent efforts to synthesize this vast literature by estimating the efficiency costs of tax competition and simulating the efficiency gains from various tax coordination palns.
Similar content being viewed by others
References
Baldwin, R. and P. Krugman. (2000). “Agglomeration, Integration and Tax Harmonization,” Centre for Economic Policy Research Discussion Paper No. 2630.
Bayindir-Upmann, T. (1998). “Two Games of Interjurisdictional Competition When Local Governments Provide Industrial Public Goods,” International Tax and Public Finance 5, 471–487.
Bjorvatn, K. and G. Schjelderup. (2002). “Tax Competition and International Public Goods,” International Tax and Public Finance 9, 111–120.
Bond, S., L. Chennells, M. P. Devereux, M. Gammie and E. Troup. (2000). Corporate Tax Harmonization in Europe: A Guide to the Debate. London: Institute for Fiscal Studies.
Bradford, D. F. (1986). Untangling the Income Tax. Cambridge: Harvard University Press.
Brennan, G. and J. Buchanan. (1980). The Power to Tax: Analytical Foundations of a Fiscal Constitution. New York: Cambridge University Press.
Brueckner, J. K. (1998). “Testing for Strategic Interaction Among Local Governments: The Case of Growth Controls,” Journal of Urban Economics 44, 438–467.
Brueckner, J. K. (2000). “A Tiebout/Tax Competition Model,” Journal of Public Economics 77, 285–306.
Brueckner, J. K. (2001). “Fiscal Decentralization with Distortionary Taxation: Tiebout vs. Tax Competition.” Manuscript, University of Illinois at Urbana-Champaign.
Brueckner, J. K. and L. A. Saavedra. (2001). “Do Local Governments Engage in Strategic Property Tax Competition?” National Tax Journal 54, 203–229.
Bucovetsky, S. (1991). “Asymmetric Tax Competition,” Journal of Urban Economics 30, 67–181.
Bucovetsky, S. and J. D. Wilson. (1991). “Tax Competition with Two Tax Instruments,” Regional Science and Urban Economics 21, 333–350.
Case, A., J. R. Hines, Jr. and H. S. Rosen. (1993). “Budget Spillovers and Fiscal Policy Interdependence: Evidence from the States,” Journal of Public Economics 52, 285–307.
Cnossen, S. (1990). “On the Direction of Tax Harmonization in European Community.” In Horst Siebert (ed.), Reforming Capital Income Taxation. Tubingen: J.C.B. Mohr.
Cnossen, S. (1996). “Company Taxes in the European Union: Criteria and Options for Reform,” Fiscal Studies17, 67–97.
Cnossen, S. (2000). “Taxing Capital Income in the Nordic Countries:AModel for the European Union?” In Sijbren Cnossen (ed.), Taxing Capital in the European Union. Oxford: Oxford University Press.
Cnossen, S. (2001). Tax Policy in the European Union: A Review of Issues and Options. Rotterdam: OCFEB.
Devereux, M. P. (2000). “Issues in the Taxation of Income from Foreign Portfolio and Direct Investment.” In Sijbren Cnossen (ed.), Taxing Capital Income in the European Union: Issues and Options for Reform. Oxford: Oxford University Press.
Devereux, M. and M. Pearson. (1989). Corporate Tax Harmonization and Economic Efficiency. London: Institute for Fiscal Studies.
Edwards, J. and M. Keen. (1996). “Tax Competition and Leviathan,” European Economic Review 40, 113–134.
European Commission. (1997). “Towards Tax Co-Ordination in the European Union: A Package to Tackle Harmful Tax Competition,” COM(97), 495. http://europa.eu.int/comm/taxation customs/publications/official doc/com/taxation/com495oct1997/en.pdf.
European Commission. (2001). “Company Taxation in the Internal Market,” COM(2001), 582. http://europa.eu.int/comm/taxation customs/publications/official doc/IP/ip1468/company tax study en.pdf.
Frey, B. and R. Eichenberger. (1996). “To Harmonize or to Compete? That's not the Question,” Journal of Public Economics 60, 335–349.
Fuest, C. and B. Huber. (1999). “Tax Coordination and Unemployment,” International Tax and Public Finance 6, 7–26.
Genser, B. and A. Haufler. (1999). “Harmonization of Corporate Income Taxation in the EU,” Aussenwirtschaft54, 319–348.
Genser, B., A. Haufler and P. B. Sørensen. (1997). “Indirect Taxation in an Integrated Europe: Is There a Way of Avoiding Trade Distortions without Sacrificing National Tax Autonomy?” In Assaf Razin and Hans-Jergen Vosgerau (eds.), Trade and Tax Policy, Inflation and Exchange Rates: A Modern View. Heidelberg: Springer.
Gordon, R. H. (1986). “Taxation of Investment and Savings in the World Economy,” American Economic Review76, 1086–1102.
Gordon, R. H. (1992). “Can Capital Income Taxes Survive in Open Economies?” Journal of Finance 47, 1159–1180.
Gordon, R. H. and J. D. Wilson. (1998). “Tax Structure and Government Behavior: A Principal-Agent Model of Government.” Manuscript, Department of Economics, Michigan State University.
Gorter, J. and R. de Mooij. (2001). Capital Income Taxation in Europe: Trends and Trade-offs. The Hague: CPB Netherlands Bureau for Economic Policy Analysis.
Grubert, H. (2001). “Tax Planning by Companies and Tax Competition by Governments: Is There Evidence of Changes in Behavior?” In J. R. Hines, Jr. (ed.), International Taxation and Multinational Activity. Chicago: University of Chicago Press, pp. 113–139.
Hamilton, B. W. (1983). “A Review: Is the Property Tax a Benefit Tax?” In G. R. Zodrow (ed.), Local Provision of Public Services: The Tiebout Model after Twenty-Five Years. New York: Academic Press.
Heyndels, B. and J. Vuchelen. (1998). “Tax Mimicking Among Belgian Municipalities,” National Tax Journal 51, 89–101.
Hoyt, W. H. (1991). “Property Taxation, Nash Equilibrium, and Market Power,” Journal of Urban Economics 34, 123–131.
Huizinga, H. and S. B. Nielsen. (1997). “Capital Income and Profit Taxation with Foreign Ownership of Firms,” Journal of International Economics 42, 149–165.
Janeba, E. and J. D. Wilson. (1999). “Tax Competition and Trade Protection,” FinanzArchiv 56, 459–480.
Janeba, E. (1998). “Tax Competition in Imperfectly Competitive Markets,” Journal of International Economics44, 135–153.
Janeba, E. (2000). “Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat,” American Economic Review 90, 1508–1519.
Kanbur, R. and M. Keen. (1993). “Jeux Sans Frontiers: Tax Competition and Tax Coordination When Countries Differ in Size,” American Economic Review 83, 877–892.
Keen, M. (1987). “Welfare Effects of Commodity Tax Harmonisation,” Journal of Public Economics 33, 107–114.
Keen, M. (1989). “Pareto-Improving Indirect Tax Harmonisation,” European Economic Review 33, 1–12.
Keen, M. (1993). “The Welfare Economics of Tax Co-ordination in the European Community: A Survey,” Fiscal Studies 14, 15–36.
Keen, M. (1998). “Vertical Tax Externalities in the Theory of Fiscal Federalism,” International Monetary Fund Staff Papers 45, 454–484.
Keen, M. (2001). “Preferential Tax Regimes can Make Tax Competition less Harmful,” National Tax Journal 54, 757–762.
Keen, M. and M. Marchand. (1997). “Fiscal Competition and the Pattern of Public Spending,” Journal of Public Economics 66, 33–53.
Kirchgassner, G. and W. W. Pommerehne. (1996). “Tax Harmonization and Tax Competition in the European Union: Lessons from Switzerland,” Journal of Public Economics 60, 351–371.
Konrad, K. K. and G. Schjelderup. (1998). “Fortress Building in Global Tax Competition,” Journal of Urban Economics 46, 156–167.
Ladd, H. F. (1992). “Mimicking of Local Tax Burdens Among Neighboring Counties,” Public Finance Quarterly20, 450–467.
Lee, K. (1997). “Tax Competition with Imperfectly Mobile Capital,” Journal of Urban Economics 42, 222–242.
Leechor, C. and J. M. Mintz. (1991). “Taxation of International Income by a Capital-Importing Country: The Perspective of Thailand.” In J. Khalilzaded-Shirazi and A. Shah (eds.), Tax Policy in Developing Countries. Washington DC: World Bank.
Lockwood, B. (1999). “Can International Commodity-Tax Harmonization be Pareto-Improving When Governments Supply Public Goods?” In A. Razin and E. Sadka (eds.), The Economics of Globalization. London: Cambridge University Press.
Lodin, S.-O. (2000). “What Ought to be Taxed and What can be Taxed: A New International Dilemma,” Bulletin for International Fiscal Documentation 54, 210–217.
McLure, C. E., Jr. (1986). “Tax Competition: Is What's Good for the Private Goose also Good for the Public Gander?” National Tax Journal 39, 341–348.
McLure, C. E., Jr. (1997). “Tax Policies for the XXIst Century.” In Visions of the Tax Systems of the XXIst Century.The Hague: Kluwer.
McLure, C. E., Jr. (2001). “Globalization, Tax Rules and National Sovereignty,” Bulletin for International Fiscal Documentation 55, 328–341.
McLure, C. E., Jr. and J. M. Weiner. (2000). “Deciding Whether the European Union should Adopt Formula Apportionment of Company Income.” In S. Cnossen (ed.), Taxing Capital in the European Union. Oxford: Oxford University Press.
McLure, C. E., Jr. and G. R. Zodrow. (1987). “Treasury-I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform,” Journal of Economic Perspectives 1, 37–58.
Mendoza, E. G. (2001). “The International Macroeconomics of Taxation and the Case Against European Tax Harmonization,” NBER Working Paper 8217.
Mintz, J. M. (1994). “Is There a Future for Capital Income Taxation?” Canadian Tax Journal 42, 1469–1503.
Mintz, J. M. (2000). “Globalization of the Corporation Income Tax: The Role of Allocation,” Finanzarchiv 56, 389–423.
Mintz, J. and H. Tulkens. (1986). “Commodity Tax Competition Between Member States of a Federation: Equilibrium and Efficiency,” Journal of Public Economics 29, 133–172.
Nielsen, S. B. and P. B. Sørensen. (1997). “On the Optimality of the Nordic System of Dual Income Taxation,” Journal of Public Economics 63, 211–229.
Oates, W. E. (1972). Fiscal Federalism. New York: Harcourt Brace Jovanovich.
Oates, W. E. (1999). “An Essay on Fiscal Federalism,” Journal of Economic Literature 37, 1120–1149.
Oates, W. E. (2001). “Fiscal Competition and European Union: Contrasting Perspectives,” Regional Science and Urban Economics 31, 133–145.
OECD (1998). Harmful Tax Competition: An Emerging Global Issue. Paris: Organization for Economic Cooperation and Development.
OECD (2000). “Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices.” Report to the 2000 Ministerial Council Meeting and Recommendations by the Committee on Fiscal Affairs. Paris: Organization for Economic Co-operation and Development.
Owens, J. (2001). “Promoting Fair Tax Competition.” Manuscript, OECD.
Parry, I. W. H. (forthcoming). “How Large Are the Welfare Costs of Tax Competition?” Journal of Urban Economics.
Radaelli, C. M. (1999). “Harmful Tax Competition in the EU: Policy Narratives and Advocacy Coalitions,” Journal of Common Market Studies 37, 661–682.
Rauscher, M. (1998). “Leviathan and Competition Among Jurisdictions: The Case of Benefit Taxation,” Journal of Urban Economics 44, 59–67.
Razin, A. and E. Sadka. (1991). “International Tax Competition and Gains from Tax Harmonization,” Economics Letters 37, 69–76.
Reiter, M. and A. Weichenrieder. (1997). “Are Public Goods Public? A Critical Survey of the Demand Estimates for Local Public Services,” Finanzarchiv 54, 374–408.
Sinn, H.-W. (1990). “Tax Harmonization and Tax Competition in Europe,” European Economic Review 34, 489–504.
Sinn, H.-W. (1994). “How much Europe? Subsidiarity, Centralization and Fiscal Competition,” Scottish Journal of Political Economy 41, 85–107.
Sinn, H.-W. (1996). “Social Insurance, Incentives and Risk Taking,” International Tax and Public Finance 3, 259–280.
Sinn, H.-W. (1997). “The Selection Principle and Market Failure in Systems Competition,” Journal of Public Economics 66, 247–274.
Sinn, S. (1992). “The Taming of Leviathan: Competition Among Government,” Constitutional Political Economy3, 177–196.
Slemrod, J. (1997). “The Taxation of Foreign Direct Investment: Operational Policy Perspectives.” In J. M. Poterba (ed.), Borderline Case: International Tax Policy, Corporate Research and Development, and Investment.Washington, DC: National Academy Press.
Sørensen, P. B. (1993). “Coordination of Capital Income Taxation in the Economic and Monetary Union: What Needs to be Done?” In F. Giavazzi and F. Torres (eds.), Adjustment and Growth in the European Monetary Union. London: Cambridge University Press.
Sørensen, P. B. (1994). “From the Global Income Tax to the Dual Income Tax: Recent Reformers in the Nordic Countries,” International Tax and Public Finance 1, 57–79.
Sørensen, P. B. (2000). “The Case for International Tax Co-ordination Reconsidered,” Economic Policy 15, 431–472.
Sørensen, P. B. (2001a). “International Tax Coordination: Regionalism versus Globalism,” CESifoWorking Paper Number 483 (May).
Sørensen, P. B. (2001b). “Tax Coordination in the European Union: What are the Issues?” Swedish Economic Policy Review 8, 143–195.
Tanzi, V. (1995). Taxation in an Integrating World. Washington, DC: Brookings Institution.
Tanzi, V. (1998). “The Need for Tax Co-ordination in an Economically Integrated World.” In P. Roberti (ed.), Financial Markets and Capital Income Taxation in a Global Economy. New York: Elsevier.
Tanzi, V. and A. L. Bovenberg. (1990). “Is There a Need for Harmonizing Capital Income Taxes Within EC Countries?” In H. Siebert (ed.), Reforming Capital Income Taxation. Tubingen: J.C.B. Mohr.
Tiebout, C. (1956). “A Pure Theory of Local Expenditures,” Journal of Political Economy 64, 416–424.
US Department of the Treasury. (2001). “Treasury Secretary O'Neill Statement on OECD Tax Havens,” May 10.
Weiner, J. M. (2001). “The European Union and Formula Apportionment: Caveat Emptor,” European Taxation10 (October).
Wildasin, D. E. (1989). “Interjurisdictional Capital Mobility: Fiscal Externality and a Corrective Subsidy,” Journal of Urban Economics 25, 193–212.
Wildasin, D. E. (1995). “Factor Mobility, Risk, and Redistribution in the Welfare State,” Scandinavian Journal of Economics 97, 527–546.
Wildasin, D. E. and J. D.Wilson. (2001). “Tax Competition: Bane or Boon?” Manuscript, University of Kentucky and Michigan State University.
Wilson, J. D. (1986). “A Theory of Interregional Tax Competition,” Journal of Urban Economics 19, 296–315.
Wilson, J. D. (1987). “Trade, Capital Mobility, and Tax Competition,” Journal of Political Economy 95, 835–856.
Wilson, J. D. (1991). “Tax Competition with Interregional Differences in Factor Endowments,” Regional Science and Urban Economics 21, 423–452.
Wilson, J. D. (1995). “Mobile Labor,MultipleTax Instruments, andTax Competition,” Journal of Urban Economics38, 333–356.
Wilson, J. D. (1999). “Theories of Tax Competition,” National Tax Journal 52, 269–304.
Zodrow, G. R. (1999). State Sales and Income Taxes. College Station, Texas: Texas A&M University Press.
Zodrow, G. R. (2001). “Implications of the Tax Competition Literature for Tax Harmonization in the European Union.” Paper Prepared for a Conference on Tax Policy in the European Union held at the Research Centre for Financial and Economic Policy (OCFEB), Erasmus University Rotterdam, The Hague, October 17–19, 2001. Available at http://www.few.eur.nl/few/research/ocfeb/congreseu/papers.htm
Zodrow, G. R. and P. Mieszkowski. (1983). “The Incidence of the Property Tax: The Benefit View versus the New View.” In G. R. Zodrow (ed.), Local Provision of Public Services: The Tiebout Model after Twenty-Five Years.New York: Academic Press.
Zodrow, G. R. and P. Mieszkowski. (1986). “Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods,” Journal of Urban Economics 19, 356–370.
Zodrow, G. R. and P. Mieszkowski. (2002). United States Tax Reform in the 21st Century. Cambridge: Cambridge University Press.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Zodrow, G.R. Tax Competition and Tax Coordination in the European Union. International Tax and Public Finance 10, 651–671 (2003). https://doi.org/10.1023/A:1026377819946
Issue Date:
DOI: https://doi.org/10.1023/A:1026377819946