Tax competition and tax coordination : when countries differ in size

The purpose of this paper is to develop a model that isrich enough to capture some of the central features of the interaction between national tax systems in an integrated world but simple enough to yield sharp insights into some of the central questions which that interaction raises. The underlying theme is the comparison between tax competition and tax cooperation. The model itself focuses on the role of the relative sizes of the economies involved. The paper consists of seven sections. Section 1 serves as an introduction. It states the paper's objectives, cites the findings of other recent studies on the subject, and lists some of the central questions raised by the economic integration of multiple countries in regard to taxation. Section 2 describes the model created by the authors. Sections 3 and 4 characterize and investigate the outcome under unrestricted tax competition, modelled as a non-cooperative (Nash) equilibrium in tax-setting. Partial measures of tax coordination are then examined in Section 5. Section 6 characterizes the jointly optimal tax structure, which suggests that the optimal joint response to freer cross-border trade may be to do absolutely nothing. Section 7 concludes by addressing some of the questions mentioned in the introduction, based on the results of the application of the model.