Tax Competition Among Jurisdictions: A Survey

Abstract

Globalization and regional economic integration have increased factor mobility and have reduced commercial barriers among countries. In this context, tax competition among national (subnational) governments to attract factors of production and consumers to their respective jurisdictions became far more intense. This paper surveys models which deal with the effects of tax competition among countries (states) on the welfare of an integrated region (federation), on tax rates, and on the levels of public expenditures. The main stream of the argument is that tax competition among countries (states) brings up distortions that lead to levels of taxation and public expenditure different from those which maximize welfare in the integrated region (federation). It follows that tax harmonization is desirable. But this does not necessarily means that different countries (states) should adopt a single common tax rate. Costs and benefits of such measure should be balanced in order to make a decision. Possible solutions for the problems created by tax competition, the empirical relevance of the negative externalities that this process brings up, and the arguments of those who defend that competition is a preferable course are also discussed. A final section pinpoints subjects for future research as, for example, the impact on Brazilian federation's welfare of tax harmonization in the Mercosur, and the relation between taxation of capital income and the choice of production location in the Brazilian federation and in the Mercosur.