Coordination of Capital Taxation Among a Large Number of Asymmetric Countries

We examine international fiscal coordination in a world where markets are integrated but national governments are sovereign. Consequences of the liberalization of the capital market on national fiscal policies and possible remedies to resulting ine¢ciencies are analyzed. A simple model, with N countries where competitive firms produce an homogeneous good using mobile capital and immobile labor is considered. Fiscal competition arises between governments that have to tax capital and labor in order to raise fixed amount of revenue. It is shown that capital mobility improves the capital allocation among countries as it enables capital owners to invest it in the country where capital is scarce. But fiscal competition leads to asymmetric capital taxation among countries and thus to a distortion on the international capital market. Two fiscal reforms are considered: the introduction of a minimum capital tax level and the imposition of a tax range, i.e. a minimum plus a maximum capital tax level. We show that the minimum tax reform is never prefered to fiscal competition by all countries while tax range reforms are unanimously accepted when it imposes convergence to the extreme taxes and it does not change the international remuneration of capital.