Chapter 5. The Theory of International Tax Competition and Coordination

This chapter surveys the theory of international tax competition and coordination, which, matching the increasing policy importance of the topic, has grown substantially over the last 30 years. It focuses on the taxation of capital income, stressing that issues arise not only in relation to movements of productive capital—the primary concern in the earliest literature—but also in relation to the shifting of paper profits. It sets out, assesses, and uses as a unifying framework, the two workhorse models in the area. After discussing the welfare properties and comparative statics of non-cooperative equilibria under unconstrained tax competition, the chapter analyzes key issues of coordination (within subsets of countries, for instance) and a range of specific topics (such as the nature and impact of tax havens).