Tax Rate Harmonization, Renegotiation and Asymmetric Tax Competition for Profits with Repeated Interaction

40 Pages Posted: 18 May 2011

See all articles by Wolfgang Eggert

Wolfgang Eggert

University of Freiburg - Institute of Public Finance; CESifo (Center for Economic Studies and Ifo Institute)

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management

Date Written: April 29, 2011

Abstract

This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim-trigger strategies. Allowing for renegotiation in the tax harmonization process generally requires more patient tax authorities to support tax harmonization as a subgame perfect equilibrium. We find somewhat paradoxical situations where higher costs of profit shifting may make international tax arrangements less sustainable under weakly-renegotiation-proof strategies.

Keywords: human capital investment, endogenous risk, learning effort, optimal taxation, public education

JEL Classification: H25, H87, F23

Suggested Citation

Eggert, Wolfgang and Itaya, Jun-ichi, Tax Rate Harmonization, Renegotiation and Asymmetric Tax Competition for Profits with Repeated Interaction (April 29, 2011). Available at SSRN: https://ssrn.com/abstract=1837308 or http://dx.doi.org/10.2139/ssrn.1837308

Wolfgang Eggert

University of Freiburg - Institute of Public Finance ( email )

D-79098 Freiburg
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jun-ichi Itaya (Contact Author)

Hokkaido University - Division of Modern Economics and Management ( email )

Sapporo 060-0809
Japan

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