Citation

Discussion Paper Details

Please find the details for DP2348 in an easy to copy and paste format below:

Full Details | Bibliographic Reference

Full Details

Title: Is Tax Policy Coordination Necessary?

Author(s): Tryphon Kollintzas, Apostolis Philippopoulos and Vanghelis Vassilatos

Publication Date: January 2000

Keyword(s): Markov-Perfect Equilibrium, Optimal Taxation, Residence And Source Principle and Tax Coordination

Programme Area(s): International Macroeconomics and Public Economics

Abstract: The answer to this question is "yes". We re-examine noncooperative and cooperative equilibria under perfect capital mobility. To this end, we develop a two-country optimal growth model with endogenous national fiscal policies. The channel for interdependence is distortionary income taxes. We study both the Residence and Source principle of international taxation. National governments play Stackelberg vis-�-vis private agents, while they can play either Nash or cooperate vis-�-vis each other. We solve for Markov-perfect (time consistent) equilibria. We show that the pertinent Nash equilibria are degenerate. Thus, under both the Residence and Source principle, only cooperative equilibria can exist. The driving force is perfect capital mobility. This is a new result that provides a strong argument for world tax coordination. When we solve for cooperative equilibria, we show that it is optimal to set a common tax rate across countries, irrespective of the principle of international taxation (Residence or Source) and differences across countries. A cooperative solution under the Source principle may be more difficult to implement than under the Residence principle.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2348

Bibliographic Reference

Kollintzas, T, Philippopoulos, A and Vassilatos, V. 2000. 'Is Tax Policy Coordination Necessary?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2348