Partial tax coordination in a repeated game setting

Abstract

This paper addresses the sustainability and stability problems of partial tax coordination among regional or national sovereign governments that aim to maximize tax revenues in a repeated game setting. We show that partial tax coordination is more likely to prevail either if the number of countries in a coalition subgroup is smaller or if the number of existing countries in the entire economy is larger. The main driving force for these results is the response of the intensity of tax competition. The increased (decreased) intensity of tax competition makes partial tax coordination more (less) sustainable. We also examine the robustness of the above result using the basic model by extending it in three ways: to the case of linear utility, a stick-and-carrot punishment strategy, and asymmetric capital endowments across countries.