On the desirability of tax coordination when countries compete in taxes and infrastructures

In our paper we show that when countries compete in taxes and infrastructures, coordination
through a uniform tax rate or a minimum rate does not necessarily create the
welfare effects observed under pure tax competition. The divergence is even worse
when the competing jurisdictions differ in the quality of their institutions. If tax revenue
is used to gauge the desirability of coordination, our model shows that imposing
a uniform tax rate is Pareto-inferior to the non cooperative equilibrium when countries
compete in taxes and infrastructures. This result is completely reversed with pure tax
competition if countries are not too uneven in size. If a minimum tax rate lying between
those resulting from the non-cooperative equilibrium is set, the low tax country
will never be better off. Finally the paper shows that the potential social welfare gains
from tax harmonization crucially depend on how heterogeneous the competing countries
are.