ON THE DESIRABILITY OF TAX COORDINATION WHEN COUNTRIES COMPETE IN TAXES AND INFRASTRUCTURE

The paper contains two distinct messages. First, when jurisdictions compete in two
independent strategic variables, the decision to coordinate on one variable (a tax rate) induces
a carry-over effect on the unconstrained instrument (infrastructure expenditures).
Consequently, classical results of the tax coordination literature may be qualified. A second
message is that the relative flexibility of the strategic instruments, which may depend
on the time horizon of the decision-making, does matter. In particular, tax coordination
is more likely to be detrimental (in terms of revenue and/or welfare) when countries can
compete simultaneously in taxes and infrastructure, rather than sequentially. The reason is
that simultaneity eliminates strategic effects between tax and non-tax instruments.