Is Tax Harmonization Useful?

It is a widely acknowledged result of the literature on capital tax competition that underprovision of public goods can only be avoided if tax coordination between governments is intensive and residence-based capital taxation can be enforced. In this paper we use a model where commodity and factor taxes are available and we show that governments competing for tax bases will choose a globally efficient tax structure. In contrast to previous conclusions, we also show that the availability of a destination-based commodity tax or a labor tax is necessary to mitigate the problem of inefficient Nash equilibria and thus reduces the necessity of supranational tax harmonization or coordination. JEL Classification: F21, H21, H87 Address: Bernd Genser (corresponding author) Wolfgang Eggert, University of Konstanz, University of Konstanz, Department of Economics, Department of Economics, PO Box D133, PO Box D133, D–7 84 57 Konstanz, D–7 84 57 Konstanz, Germany. Germany. E-mail: Bernd.Genser@uni–konstanz.de Wolfgang.Eggert@uni–konstanz.de ∗We thank Andreas Haufler for useful suggestions and comments.