Coordinating Capital Income Taxation Among a Subset of Countries

Abstract

Tax competition among countries generally leads to inefficiently low tax rates on mobile tax bases like capital income. This should call for cooperative tax policies to be implemented, but as long as some countries do not take part in the cooperation the incentives for a subset of countries to undertake cooperative action may be limited. The outcome of such ''partial cooperation'' is derived within a linear-quadratic tax competition model, and the results suggest that positive, but insignificant welfare effects are to be reaped for the participating countries (the main benefits accruing to the countries not participating). The implications of these results for EU-policies on capital income taxation are briefly discussed.