The role of international public goods in tax cooperation

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1 MPRA Munih Personal RePE Arhive The role of inernaional publi goods in ax ooperaion Panelis Kammas and Aposolis Philippopoulos Deparmen of Eonomis, Universiy of Ioannina, Deparmen of Eonomis, Ahens Universiy of Eonomis & Business 15. May 009 Online a hp://mpra.ub.uni-muenhen.de/15844/ MPRA Paper No , posed. June :59 UTC

2 The role of inernaional publi goods in ax ooperaion by Panelis Kammas a,b and Aposolis Philippopoulos May 15, 009. Absra: We provide a quaniaive assessmen of he welfare os of ax ompeiion or, equivalenly, he welfare benefi of inernaional ax poliy ooperaion. We use a simple muli-ounry general equilibrium model of a world eonomy, in whih here are wo ypes of ross-ounry spillovers: he firs one is generaed by inernaional apial mobiliy and he seond by he presene of an inernaional publi good. In he absene of inernaional publi goods, alhough welfare in he non-ooperaive ase is ypially lower han in he ooperaive ase, he welfare differene is negligible quaniaively. Things hange drasially, boh quaniaively and qualiaively, one we inrodue inernaional publi goods. Now, here an be big benefis from ooperaion and welfare effes ease o be monooni. Keywords: Capial mobiliy; Tax ompeiion; Publi goods; Welfare. JEL Classifiaion: F0, H, H4. Aknowledgemens: We are graeful o K. Angelopoulos, G. Eonomides, C. Kosogiannis and H. Park for disussions and ommens. We have also benefied from ommens by A. Adam, M. Delis, V. Dioikiopoulos, T. Mouos and N. Tsakiris. Any errors are ours. The firs o-auhor aknowledges finanial suppor from he Greek Minisry of Eduaion and he European Union under he "Iraklios" researh fellowship program. a Universiy of Ioannina b Corresponding auhor: Panelis Kammas, Deparmen of Eonomis, Universiy of Ioannina, P.O. Box 1186, Ioannina, Greee. kammas@.uoi.gr Ahens Universiy of Eonomis & Business, Universiy of Glasgow, and CESifo. 0

3 I. Inroduion One of he main resuls in inernaional eonomis is ha non-ooperaive (Nash) naional ax poliies lead o a rae-o-he-boom and subopimal ouomes. Hene here is need for inernaional ooperaion. Suh argumens beome sronger as he degree of eonomi inegraion inreases and ax ompeiion beomes fierer. 1 Bu reen quaniaive sudies using general equilibrium models wih Ramsey-ype poliymakers indiae ha he welfare gains from oordinaed ax poliies are no signifian quaniaively (see e.g. Mendoza and Tezar, 005, and Sørensen, 004). In mos of hese sudies, he welfare gains from oordinaion are around one peren of GDP and remain robusly small aross differen model speifiaions and poliy senarios. In his paper, we reexamine he quaniaive welfare impliaion of inernaional ax ooperaion. The differene from mos of he relaed lieraure is ha we inorporae an inernaional publi good, namely a publi good whose benefis an exend beyond naional boundaries (see Bjorvan and Shjelderup, 00, and Tabellini, 003). As Tabellini (003) poined ou, suh goods onsiue an imporan faor of he EU. Examples inlude foreign/defense poliy and environmenal qualiy. In addiion, he aboliion of borders beween EU member saes has generaed a saus of inreased rossounry spillovers in several areas suh as inernal seuriy, border onrols, immigraion poliy and sienifi researh. We show ha he inorporaion of inernaional publi goods in a model of inernaional ax ompeiion hanges he above menioned resuls drasially. We use a muli-ounry version of he general equilibrium model in Persson and Tabellini (199). This is simple, raable and delivers an analyial soluion. There are wo ypes of ross-border spillovers. The firs one is generaed by inernaional apial 1 See e.g. Persson and Tabellini (199, 1995) who also review he lieraure. The sandard rae-o-heboom resul is usually derived in a seup where he only ross-ounry spillover effe, or exernaliy, is generaed by inernaional apial mobiliy and naional poliy insrumens are hosen by Ramsey (benevolen) poliymakers. A similar seup is used here. Noe ha inernaional ooperaion an beome ouner-produive if we depar from Ramsey poliymakers and here are failures a poliymaking level. Here we do no sudy suh issues so ooperaion is superior o non-ooperaion. See Razin and Sadka (1999) for various poliial-eonomy aspes of ax ompeiion. For empirial evidene of ax ompeiion in OECD ounries, see e.g. Devereux, Lokwood and Redoano (008). Wha is small or large is of ourse arbirary. One peren gain may be onsidered o be large enough. The key poin, however, is wheher he welfare gain from ooperaion hanges subsanially aross differen model speifiaions. Here we show ha i does, one we inrodue inernaional publi goods.

4 mobiliy and resuls in he problem of ax ompeiion for mobile ax bases. The seond spillover is generaed by he presene of inernaional publi goods and resuls in he problem of free riding on oher ounries onribuion. When we solve he model numerially o ge a measure of general equilibrium welfare, our resuls are as follows. In he absene of inernaional publi goods, he welfare gain from ooperaion is small quaniaively. The reason is ha higher ax raes (as we swih from Nash o ooperaion) is good for publi goods provision in he shor run, bu hey are bad for privae invesmen and in urn fuure onsumpion. The laer offses he benefiial effe of higher publi goods provision in he shor run. Thus, in a non-sai seup, subopimally low Nash ax raes are no ha bad quaniaively, as already shown by e.g. Mendoza and Tezar (005). Resuls hange drasially one we inrodue inernaional publi goods. Alhough, as menioned above, we realize ha wha is small or large is arbirary and we should be auious how o read hese numbers, i is fair and robus o laim ha: (a) The inroduion of inernaional publi goods ino a raher onvenional model wih inernaional apial mobiliy makes he welfare gain from ooperaion pariularly big. Thus, he argumen for inernaional ooperaion beomes muh sronger when here are publi goods ha exend beyond naional borders. (b) The ombinaion of he wo spillovers has qualiaive impliaions oo: he welfare gain from ooperaion is nonmonooni in he magniude of ross-ounry spillovers from inernaional publi goods; afer a urning poin, he welfare gain falls wih his magniude (see also Bjorvan and Shjelderup, 00, for similar effes on ax raes). The res of he paper is as follows. Seion II solves for a world ompeiive equilibrium. Seion III solves for opimal poliies. Seion IV onludes. II. World eonomy Consider a world eonomy omposed of a finie number of idenial ounries N, indexed by i = 1,,..., N. Eah ounry i is populaed by a represenaive privae agen and a benevolen Ramsey naional governmen. The privae agen in eah ounry onsumes and invess a home and abroad, where invesmen abroad implies a mobiliy or

5 ransaion os (he laer provides a measure of he degree of apial mobiliy). The naional governmen in eah ounry an ax domesi and foreign invesors a he same rae (soure priniple of axaion) o finane he provision of a publi good whose benefis an exend beyond naional boundaries. We use a simple wo-period (presen and fuure) model adaped from Persson and Tabellini (199). The differenes are ha here we use a muli-ounry version of his model and add an inernaional publi good as in Bjorvan and Shjelderup (00). All ounries produe he same ommodiy and have aess o a linear ehnology. The sequene of evens is as follows. In he beginning of he game, naional governmens hoose one-and-for-all heir ax poliy and he assoiaed onribuion o he publi good. In urn, privae agens maximize heir lifeime uiliy making heir invesmen and (presen and fuure) onsumpion deisions. Working wih bakward induion, we firs solve he privae agens problem by aking pries and poliies as given. This will give us a World Compeiive Equilibrium (WCE) whih is for any feasible poliies. In urn, we solve for Nash naional ax poliies. Namely, eah naional governmen hooses is own ax rae opimally subje o he WCE by aking as given he ax poliies of he oher governmen. We also solve for ooperaive naional poliies; his will serve as a benhmark. II.1 Behavior of privae agens The represenaive household in eah ounry i maximizes: U = U(,, G ) (1a) i i i i 1 i i where 1 and are privae onsumpion in he firs and seond period respeively, and i G is he inernaional publi good from he viewpoin of privae agen loaed in ounry i (see equaion (5) below). The uiliy funion is inreasing and quasi-onave. For algebrai simpliiy, we use an addiively separable funion of he form: U i i i i = log νg (1b) 3

6 where ν is he weigh given o publi servies relaive o privae onsumpion. 3 The firs-period budge onsrain of he privae agen in ounry i is: N i ii ij i = j( i) = 1 k k e (a) ha is, he privae agen begins wih an exogenous endowmen, e i, and uses his endowmen for onsumpion, i 1, invesmen a home, k ii, and invesmen in oher ounries j i denoed as ij k. The seond-period budge onsrain of he privae agen in ounry i is: N N i i i ii j j ij = (1 ) + (1 ) j( i) = 1 j( i) = 1 Ak A k ij ij m ( k ) (b) i j where 0< < 1 and 0 < < 1 are inome ax raes in ounries i and j i respeively, i j he parameers A > 0 and A > 0 are he exogenous apial reurns in i and j ij respeively, and m 0 is a measure of ransaion oss when an invesor loaed in i invess in j i (as said above, ij m provides a measure of inernaional apial mobiliy, ij ij where m = 0 implies perfe mobiliy and m zero mobiliy). Privae agens a ompeiively by aking poliy variables as given. Subsiuing (a) and (b) ino (1b), he firs-order ondiions wih respe o k ii and k ij give respeively (hese are Euler-ype equaions): 1 (1 i ) A i = (3a) i 1 3 In he numerial soluions below, we se ν > 1. This parameer range is needed o ge a well-defined soluion in general equilibrium, namely when poliies are opimally hosen. In pariular, we need ν > 1 o ge ha he ax rae inreases wih he iniial endowmen (see Appendix). Wih a linear produion ehnology, a higher endowmen inreases he ax base on a one-o-one basis (see equaion (6e) below). We hus need o value he publi good a lo in order o make an effiien use of he higher ax revenue. See below abou parameer values used in he numerial soluion. 4

7 1 i 1 j = (1 ) A j m ij k ij for j i (3b) i i j j ij ij so ha (1 ) A = (1 ) A m k. Thus, wihou unerainy, ne reurns are equalized. II. Naional governmen budge onsrain Eah naional governmen i spends i g on a publi good by axing domesi and foreign invesors a he same rae, 0 < i < 1. Thus, assuming a balaned budge, he budge onsrain of naional governmen in ounry i is: i i i i g = A k (4) where N i ii ji ji k = k + k denoes he oal apial sok in ounry i ( k is he apial j( i) = 1 invesed in ounry i by invesors loaed in ounry j i ). II.3 Inernaional publi good To model he inernaional publi good i G, as defined in (1a)-(1b) above, we follow e.g. Alesina and Waziarg (1999) and Bjorvan and Shjelderup (00), by assuming: N i i j G = g + b g (5) j( i) = 1 where he parameer 0 b 1 measures he srengh of inernaional spillovers in publi good provision. When b = 0, here is no spillover and he publi good is naional or loal. When b = 1, here are perfe spillovers and he publi good is fully inernaional. 5

8 II.4 World Compeiive Equilibrium (given poliies) We now solve for a World Compeiive Equilibrium (WCE) for any feasible poliy. As equaion (4) shows, only one of he wo poliy insrumens ( g and ) an be se independenly in eah ounry. We hoose o express he WCE in erms of naional ax raes ( ). Then, i is sraighforward o show ha ()-(4) imply: i 1 1 = i i (1 ) A (6a) N N i i i ii j j ij ij = (1 ) + (1 ) j( i) = 1 j( i) = 1 Ak A k m j( i) = 1 ij ( k ) (6b) N i i i ii ji g = A( k + k ) (6) k ij (1 j ) A j (1 i ) A i = (6d) ij m N ii i 1 ij k = e k i i (6e) (1 ) A = j( i) 1 where (6a), (6b), (6), (6d) and (6e) give respeively he firs-period onsumpion, he seond-period onsumpion, governmen expendiure on he publi good, apial invesed abroad and apial invesed a home. This is for eah ounry i = 1,,..., N. We sum up his seion. We have solved for a World Compeiive Equilibrium (WCE). This holds for any feasible poliy as summarized by he naional ax raes, i, where i = 1,,..., N. In his equilibrium: (i) privae agens maximize heir uiliy; (ii) all onsrains are saisfied; (iii) all markes lear. This WCE is given by (6a-e) and (5). Noie ha, hanks o he model speifiaion, we have managed o ge losed-form soluions for equilibrium alloaions as funions of i and parameers only. This will be i onvenien algebraially when we endogenize poliy,. Before we move on o opimal poliies, i is helpful o idenify he naure of exernal effes from foreign ax poliy on domesi welfare. Reall ha here are wo ypes of ross-border spillovers in he model: spillovers from inernaional apial movemens and inernaional publi goods. Inernaional apial movemens generae he 6

9 sandard ax ompeiion effe (if he foreign ounry inreases is ax rae, he domesi ounry aras apial) and he ax-he-foreigner effe (if he foreign ounry inreases is ax rae, i also hurs he inome and welfare of domesi invesors who inves abroad). Inernaional publi goods generae a free riding effe (if he foreign ounry inreases is ax rae, i onribues o he provision of he global publi good). The ax ompeiion and he free riding exernaliies are boh posiive and hene will boh end o push he unoordinaed ax rae below is Pareo effiien value. The ax-he-foreigner effe an be negaive or posiive depending on wheher he domesi ounry is exporer or imporer of apial and hene an work in eiher direion. 4 We leave he soluion below o deermine he ne final exernaliy and hene how Nash and ooperaive poliies may differ. III. Naional poliies and world equilibrium We move on o he firs sage of he game and endogenize naional poliies, i. Naional poliies are hosen by benevolen naional governmens ha eiher play Nash or ooperae. When hey hoose i, benevolen naional governmens ake ino aoun he World Compeiive Equilibrium speified above. We will solve for symmeri (Nash and ooperaive) equilibria in naional poliies. Thus, in equilibrium, i j i j =, 1 = 1 1, =, i j ii jj k k k ij ji =, k = k 0, i j g g g =, where i j. 5 III.1 Nash poliies Eah naional governmen i hooses i o maximize (1b) subje o (6a-e) and (5). In doing so, i akes j, wih j i, as given. Using equaions (6a-e) and (5) ino (1b), deriving he firs-order ondiion for i, invoking symmery, and assuming exisene of an inerior soluion we ge (we now omi ounry supersrips): 4 These hree effes an be also shown algebraially if we differeniae he domesi welfare wih respe o he foreign ax rae. The parial is a bi unfriendly bu one an disinguish he hree effes. Resuls are available upon reques from he auhors. 5 Even if, in a symmeri equilibrium, here are no apial flows ex pos (see equaion (6d)), deisions are affeed ex ane and his is enough o apure he ineffiienies in he absene of ooperaion. 7

10 A e = 1 1 A( N 1)(1 b) v A e A(1 ) A(1 ) (1 ) m (7) whih is an equaion in he Nash ax rae only. Comparaive sais an show ha he Nash ax rae, denoed as n n, follows = ( N, b, m, v, e). 6 If in urn we use (6a-e) and (5), we ge a symmeri Nash equilibrium (SNE). n ino III. Cooperaive poliies Consider now he referene ase in whih naional ax poliies are hosen joinly by maximizing he sum of individual ounries welfare. Tha is, a worldwide benevolen soial planner hooses joinly all i o maximize he sum of (1b) over all ounries. Working as above, i is sraighforward o show ha in Symmeri Cooperaive Equilibrium (SCE), we have insead of (7): 1 1 A e = v[1 + b( N 1)] A e A(1 ) A(1 ) (1 ) (8) whih is an equaion in he ooperaive ax rae only. Comparaive sais an show ha he ooperaive ax rae, denoed as , follows = ( N, b, v, e). 7 If in urn we use ino (6a-e) and (5), we ge a symmeri ooperaive equilibrium (SCE). III. 3 Comparison of SNE o SCE Numerial soluions are repored in Tables 1-5 below. These Tables repor he equilibrium ax raes, he assoiaed maroeonomi ouomes and he resuling general equilibrium welfare, in boh he non-ooperaive and ooperaive ase, for various parameer ombinaions. To ge welfare in he non-ooperaive ase, we solve equaion (7) for he Nash ax rae, use his soluion ino (6a-e) and (5), and in urn plug he 6 See Appendix A for deails. 7 See Appendix B for deails. 8

11 resuling values of 1,, G ino he welfare funion (1b). We work similarly wih he ooperaive ase in whih he ax rae is given by equaion (8). We are mainly ineresed in he effes of he key parameers, m 0 and 0 b 1, where reall ha m 0 is a measure of inernaional apial mobiliy and 0 b 1 is a measure of inernaional spillovers in publi goods provision. Tables 1a and 1b repor respeively he ase in whih here is eiher inernaional apial mobiliy only, or inernaional publi goods only. By onras, Tables a and b repor he ases in whih boh ypes of ross-border exernaliies oexis. Speifially, Table 1a ses b = 0 (i.e. no inernaional publi goods) and sudies wha happens for hanging values of m 0, while Table 1b ses m (i.e. zero apial mobiliy) and sudies wha happens for hanging values of 0 b 1. Table a sudies wha happens for hanging values of m in he presene of inernaional publi goods (say b = 0.1), while Table b sudies he effes of hanging values of b in he presene of inernaional apial mobiliy (say m = 0.1). Tables 1a-b and a-b here There are six resuls below. Resuls 3, 4 and 6 give he key poins of he paper, while Resuls 1, and 5 onfirm ha he model also delivers he main resuls in he lieraure. 8 Resul 1. In all ases, he Nash ax rae is less han, or equal o, he ooperaive ax rae n (i.e. 0 < < 1). Also, welfare under Nash is less han, or equal o, welfare under ooperaion. Only when we se m and b = 0 in Table 1a (i.e. neiher inernaional apial mobiliy, nor inernaional publi goods, so ha he eonomies are praially losed), he wo soluions oinide. In all inerior ases ( 0 m < and/or b > 0 ), he Nash ax rae is found o be sub-opimally low. This means ha he exising ross-ounry 8 We use Mahemaia, version Apar from ν > 1, resuls are robus o hanges in parameer values. We also repor well-defined soluions only (for insane, we do no repor soluions for ax raes higher han one or negaive apial soks). This is no unusual: ompuable general equilibrium models work for some range of parameer values. 9

12 spillovers (from inernaional apial movemens and inernaional publi goods) generae a ne posiive exernaliy. 9 Resul. I is useful o sar wih quaniaive resuls in he popular speial ase in whih here are no inernaional publi goods. This is he ase in Table 1a. In he absene of inernaional publi goods ( b = 0 ), he welfare differene beween he non-ooperaive ase and he ooperaive ase is relaively small. This happens even when he ax raes differ a lo beween he wo ases. For insane, when he mobiliy os is m = 1, he n Nash ax rae is = 0. 98, while he soially opimal ax rae is = Neverheless, despie his big differene in ax raes, he uiliy levels are prey lose: n U ( ) = in he Nash ase versus U ( ) = in he ooperaive ase, so ha he welfare gains from oordinaion are.7 perenage poins. The inuiion behind his resul is revealed by looking a maroeonomi ouomes. Reall ha uiliy depends on boh privae onsumpion and publi good provision (see equaion (1b)). Our numerial simulaions imply ha higher ax raes (as we swih from Nash o ooperaion) an be good for publi good provision, bu are pariularly bad for seond-period privae onsumpion. This happens beause higher ax raes hur privae invesmen and in urn fuure privae onsumpion (see equaion (6b)) so ha he benefiial effe of higher ax raes ges smaller. Therefore, in a dynami seup, Nash ax raes are no ha bad quaniaively. This is differen from a sai model, where higher ax raes an inrease he provision of publi goods wihou huring he eonomy in he fuure. The sandard argumen - ha ax ompeiion is harmful in he presene of ross-ounry spillovers - beomes weaker in a dynami seup. Finally, in Table 1a, he effe of m is monooni, in he sense ha as apial mobiliy rises and ax ompeiion ges fierer (i.e. as m ges smaller), he differene beween he wo (Nash and ooperaive) ax raes and hene he gain from ooperaion rise. This monooni effe also holds in he presene of inernaional publi goods (see Table a below), i.e. i holds for any value of 0 b 1. 9 Reall he game-heorei resul: in he presene of posiive (resp. negaive) exernaliies, players sraegies are ineffiienly low (resp. high) in a Nash equilibrium relaive o a ooperaive equilibrium. See Cooper and John (1988) and for an exension Philippopoulos and Eonomides (003). This applies o symmeri equilibria. 10

13 Resul 3. Consider now he symmerially opposie ase from he one desribed above. Namely, here is zero apial mobiliy ( m ) so ha i is only publi goods ha generae ross-border spillovers. This ase is repored in Table 1b. The benefis from ooperaion beome bigger han hose in Table 1a. Thus, free riding problems maer more han problems assoiaed wih inernaionally mobile ax bases. Also noe ha, in he absene of apial mobiliy, he welfare benefi is monooni in b (see Table 1b). Tha is, wihou apial mobiliy, as he magniude of inernaional spillovers from publi goods provision inreases, he inenive o free ride on oher ounries provision of publi goods beomes sronger, and hene he differene beween he wo (Nash and ooperaive) ax raes and he gain from ooperaion rise monoonially. Resul 4. In Tables a and b, boh spillovers are presen. The ombinaion of inernaional apial mobiliy ( 0 m < ) and inernaional publi goods ( b > 0 ) makes he gains for ooperaion really big. For insane, ompare Table 1a (zero inernaional spillover from publi goods) o Table a (a modes degree of inernaional spillover from publi goods) by fousing on he same magniude of inernaional apial mobiliy; when say m = 1, he welfare gain from ooperaion is 49 perenage poins in Table a, while i is only.7 perenage poins in Table 1a. The fa ha i is he ombinaion of he wo spillovers ha makes he quaniaive differene is onfirmed when we ompare Tables 1b (no apial mobiliy) and b (apial mobiliy), boh for varying values of 0 b 1. The benefis are muh bigger in Table b. Thus, he inroduion of inernaional publi goods ino a model wih inernaional apial mobiliy has drasi quaniaive welfare impliaions. I is imporan o noe however ha, for given 0 m <, he effe of b is no monooni. This is shown in Table b, where we se say m = 0.1 and examine he effes from hanges in 0 b 1. Up o a riial value of b, denoed as * b, whih is around 0.6 in Table b, he higher he magniude of inernaional spillovers from publi goods provision, or he worse he free riding problem, he higher he welfare gain from ooperaion. Bu afer b *, he higher is he value of b, he lower ges he welfare gain 11

14 from ooperaion. This happens beause, afer * b, as he publi good urns from loal o inernaional, he inenive o ompee for mobile ax bases is redued. Aually, in he speial ase of perfe inernaional spillovers from provided publi goods ( b = 1), he inenive o ompee for mobile ax bases and he disorions assoiaed wih his, are ompleely eliminaed. This is shown by he fa ha when b = 1, he soluion is independen of he assumed value of m (see e.g. Tables 1b and b). This is similar o he main resul in Bjorvan and Shjelderup (00). Of ourse, as poined ou by Bjorvan and Shjelderup, here is sill undersupply of publi goods in he Nash equilibrium due o free riding. Therefore, when boh inernaional spillovers are presen, hey do no simply add up o a single exernaliy. Their ineraion is nonlinear in he sense ha he effes of b are nonmonooni. 10 Resul 5. We nex repor he effes of oher parameer values. Tables 3a- repor resuls for hanging values of populaion size ( N ), when respeively here is apial mobiliy bu no inernaional publi goods ( 0 m < and b = 0 ), here are boh apial mobiliy and inernaional publi goods ( 0 m < and b > 0 ) and here are inernaional publi goods bu no apial mobiliy ( b > 0 and m ). Resuls are monooni. The welfare gain from ooperaion inreases wih he size of populaion. This happens beause, in symmeri equilibria, oordinaion problems, or Nash-ype ineffiienies, ge worse wih he number of players. 11 Tables 3a- here Tables 4a- repor wha happens when he valuaion of he publi good (ν ) hanges. We onsider he same hree ases as above. Resuls are again monooni. In Tables 4a-b, wih apial mobiliy, as ν rises, he welfare gain from ooperaion ges larger. By onras, in Table 4, wihou apial mobiliy, as ν rises, he welfare gain from ooperaion ges smaller. The idea in Table 4 is ha, when he only inernaional spillover is from publi goods provision, he more we value publi goods, he more we 10 We are graeful o a referee for poining his ou o us. 11 In he ase of asymmeri equilibria, he relaion is ambiguous. 1

15 inernalize ross-ounry spillovers even in he absene of ooperaion. On he oher hand, when here is also inernaional apial mobiliy, as in Tables 4a-b, he dominan effe of ν is hrough inernaional apial flows. Tables 4a- here Resul 6. Combining he above resuls, i is only he value of 0 b 1 ha produes humped-shaped effes on he gain from ooperaion, and his happens when boh inernaional publi goods and inernaional apial mobiliy are presen. Resuls are summarized in Tables 5a-b (wo differen values of mobiliy oss), 5-d (wo differen values of populaion size) and 5e-f (wo differen values of publi goods valuaion). In all hese ables boh spillovers are presen and we experimen wih hanging values of 0 b 1. Noie ha he urning poin of b ( b * ) depends on he magniude of all oher parameers. Tables 5a-f reveal ha he urning poin of b arrives laer (i.e. b * ges larger), when inernaional apial mobiliy inreases (i.e. m ges smaller), he number of ounries inreases (i.e. N ges bigger), or he valuaion of he publi good dereases (i.e. ν ges smaller). The inuiion behind he effes of m (see Tables 5a-b) and N (see Tables 5-d) is as follows. Lower values of m and/or higher values of N make oordinaion more desirable or, equivalenly, make ax ompeiion oslier. Hene, hey delay he possibiliy o offse - via inernaional spillovers from loally provided publi goods - he disorive effes from ax ompeiion. The inuiion behind he effes of ν (see Tables 5e-f) is as follows. Boh b and ν work hrough he same hannel, namely inernaional publi goods. Also, as we have seen above, higher values of 0 b b (given ν ) and higher values of ν (given b ) work in he same direion inreasing he welfare loss from ax ompeiion. Hene, before he urning poin of b ( b * ), hey an be hough as subsiues. This is why as ν ges smaller, * b an ge larger in Tables 5e-f. * Tables 5a-f here 13

16 IV. Conlusions, relaed work and exensions We provided a quaniaive assessmen of he welfare benefis from inernaional ax poliy ooperaion. We showed ha, one we inrodue inernaional publi goods o a raher sandard model of ax ompeiion, he differene in ax poliies is refleed o a big differene in welfare and hene here are subsanial gains from ax ooperaion. Free riding on eah oher s onribuion o inernaional publi goods appears o be more imporan and osly han ax ompeiion for mobile ax bases. On he oher hand, welfare effes are no monooni in he degree of inernaional spillovers from publi goods provision. A menioned already, a paper lose o ours is Bjorvan and Shjelderup (00). However here are differenes. Here we invesigaed he quaniaive impliaions of inernaional publi goods for he welfare benefis from inernaional ooperaion. By onras, Bjorvan and Shjelderup foused on he ase in whih perfe spillovers from inernaional publi goods eliminae he derimenal effe from ax ompeiion. Besides, alhough his is less imporan, here are modeling differenes. For insane, our model allows for various degrees of apial mobiliy as well as for boh urren and fuure onsumpion (his helps us o idenify how ax ompeiion for mobile ax bases is good for urren invesmen and fuure onsumpion). I would be ineresing o add more ypes of ross-ounry spillovers. Here, we foused on inernaional apial flows and inernaional publi goods. I would also be ineresing o sudy he above issues ino a fully dynami general equilibrium neolassial growh model. 14

17 Table 1 : Eiher inernaional apial mobiliy only, or inernaional publi goods only Table 1a: b=0, hanging m n m ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) m (A=1, v=1.1, e=100, N=15) Table 1b: m, hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, N=15, e=100) 15

18 Table : Boh inernaional apial mobiliy and inernaional publi goods Table a: b=0.1, hanging m n m ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) m (A=1, v=1.1, e=100, N=15) Table b: m = 0.1, hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, e=100, N=15) 16

19 Table 3 : Effe of populaion size (N) Table 3a: b=0, hanging N N n ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, e=100, m=0.1) Table 3b: b=0.1, hanging N n N ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, e=100, m=0.1) Table 3: m, hanging N n N ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, e=100, b=0.1) 17

20 Table 4 : Effe of publi goods valuaion (v) Table 4a: b=0, hanging v n v ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, N=15, e=100, m=0.1) Table 4b: b=0.1, hanging v n v ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, N=15, e=100, m=0.1) Table 4: m, hanging v n v ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, N=15, e=100, b=0.1) 18

21 Table 5 : Effes of m, N and v on he riial value of b Table 5a: m = 0.1, hanging b b n ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, N=15, e=100) Table 5b: m=0.5, hanging b b n ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, N=15, e=100) 19

22 Table 5: N=10, hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, m=0.1, e=100) Table 5d: N=0, hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, v=1.1, m=0.1, e=100) 0

23 Table 5e: v=1., hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, N=15, m=0.1, e=100) Table 5f: v=1.5, hanging b n b ( n ) 1 ( n ) n n g( ) U ( ) ( ) 1 ( ) g( ) U ( ) (A=1, N=15, m=0.1, e=100) 1

24 Appendies Appendix A: A Nash equilibrium in naional poliies is summarized by he ax rae ha n solves equaion (7). This non-ooperaive ax rae, 0 < < 1, is unique. Also n omparaive sai exerises imply = ( N, b, m, v, e) ; hus, he ax rae dereases wih he number of ounries and inreases wih he srengh of inernaional spillovers, mobiliy oss, he weigh given o publi goods, and he iniial endowmen. Proof: Consider (7). Define he lef hand side as 1 LHS A e, and he righ hand A(1 ) 1 A(1 b)( N 1) side as RHS v A e. Then, aking parials wih A(1 ) (1 ) m 1 respe o he ax rae, we have LHS = 0 (1 ) < and RHS A (1 b)( N 1) = v + + < 0 3 (1 ) (1 ) m. Also, from he seond-order ondiion of he maximizaion problem, RHS > LHS for 0< < 1. Hene, assuming exisene of a 0 < < 1, here is a unique soluion n as illusraed in Figure 1. In urn, oal differeniaion in (7) implies n A v( N 1)(1 b) = m m ( LHS RHS), whih is posiive sine ( LHS RHS ) > 0. Also, n A( v 1) = e ( LHS RHS ), whih is posiive for v > 1. In addiion, 1 A ( N 1)(1 b) n A e A(1 ) (1 ) m RHS = = v LHS RHS v( RHS LHS ) and n A v( N 1) = b m( LHS RHS ) sine 0< b < 1. whih are also posiive. Finally, n A v( b 1) = <0, N m( LHS RHS )

25 Figure 1: Nash ax rae (RHS,LHS) 0 18 LHS RHS ( n ) (A=1, e=0, v=1.1, b=0.1, N=10, m=0.) Appendix B: A ooperaive equilibrium in naional poliies is summarized by he ax rae ha solves equaion (8). This ooperaive ax rae, 0< < 1, is unique. Also omparaive sai exerises imply = ( N, b, v, e) ; hus, he ax rae inreases wih he number of ounries, he srengh of inernaional spillovers, he weigh given o publi goods and he iniial endowmen, bu i is independen of mobiliy oss. Proof : Consider (8). Define he lef hand side as 1 LHS A e, and he righ A(1 ) 1 hand side as RHS v[1 + b( N 1)] A e. Then, aking parials wih A(1 ) (1 ) 1 respe o he ax rae, we have LHS = 0 (1 ) < RHS = v[1 + b( N 1) + < 0 3 (1 ) (1 ). Also, from he seond-order ondiion of he maximizaion problem, we have RHS > LHS for 0< < 1. Hene, assuming exisene of a 0< < 1, here is a unique soluion as illusraed in Figure. and

26 In urn oal differeniaion in (8) implies = 0, m 1 posiive for v > b + 1. In addiion A( v( b+ 1) 1) =, whih is e ( LHS RHS ) 1 A e A(1 ) (1 ) RHS = (1 + bn ( 1)) =, v LHS RHS v( RHS LHS ) 1 A e A(1 ) (1 ) = vn ( 1) b ( LHS RHS ) whih are all posiive. and 1 A e A(1 ) (1 ) = vb N ( LHS RHS ) Figure : Cooperaive ax rae (RHS,LHS) RHS 0 LHS ( ) (A=1, e=0, v=1.1, b=0.1, N=10) 4

27 Referenes Alesina, A. and Waziarg, R. (1999). Is Europe is going oo far? Carnegie-Roherser Conferene Papers on Publi Poliy, 51, 1-4. Bjorvan, K. and Shjelderup, G. (00). Tax ompeiion wih inernaional publi goods. Inernaional Tax and Publi Finane, 9, Cooper, R. and John, A. (1988). Coordinaing oordinaion failures in Keynesian models. Quarerly Journal of Eonomis, 103, Devereux, M., Lokwood, B. and Redoano, M. (008). Do ounries ompee over orporae ax raes? Journal of Publi Eonomis, 9, 5-6, Kammas, P. and Philippopoulos, A. (007). How Harmful is Inernaional Tax Compeiion? in Regionalisaion, Growh, and Eonomi Inegraion, edied by G. Korres. Physia-Verlag HD, Springer. Mendoza, E. and Tezar, L. (005). Why Hasn' Tax Compeiion Triggered a Rae o he Boom? Some Quaniaive Lessons from he EU, Journal of Moneary Eonomis, 5, Persson, T. and Tabellini, G. (199). The poliis of 199: Fisal poliy and European inegraion, Review of Eonomi Sudies, 59, Persson, T. and Tabellini, G. (1995). Double-edged inenives: insiuions and poliy oordinaion, in Handbook of Inernaional Eonomis, volume 3, edied by G. Grossman and K. Rogoff. Norh-Holland, Amserdam. Philippopoulos, A. and Eonomides, G. (003). Are Nash ax raes oo low or oo high? The role of endogenous growh in models wih publi goods, Review of Eonomi Dynamis, 6, Razin, A. and Sadka, E., ediors, (1999). The Eonomis of Globalizaion: Poliy Perspeives from Publi Eonomis. Cambridge Universiy Press, Cambridge. Sørensen, P., (004). Inernaional ax oordinaion: Regionalism versus globalism, Journal of Publi Eonomis, 88, Tabellini, G. (003). Priniples of poliymaking in he EU: An eonomi perspeive, CESifo Eonomi Sudies, 49,