Using Prisoner's Dilemma to Evaluate Corporate Tax Reform Proposals

Abstract

The game Prisoner’s Dilemma provides a helpful tool for understanding international tax competition. Nations would be best served by cooperating with each other to keep corporate income tax rates high. But fearing defection by other nations, many nations often unilaterally lower their corporate income tax rates. In the process they shift the tax burden onto labor and consumers which increases inequality, erodes democracy, decreases consumer demand, and can lead to recessions. International coordination and upward harmonization of corporate tax rates is the optimal solution to the problems caused by international tax competition. Applying the lessons of game theory to several leading corporate tax reform proposals shows that lowering the top statutory corporate tax rate, a repatriation holiday, integration of the personal and corporate income tax, and Representative Dave Camp's proposed shift to a territorial system of corporate taxation would all speed the race to the bottom. But a minimum tax on foreign earnings or a sales-only version of formulary apportionment could potentially halt the race to the bottom.