Asymmetric Competition and Co-ordination in International Capital Income Taxation

Complete descriptions of Cournot-Nash equilibria in a model with large and asymmetric countries and international mobile capital are given. These countries have two tax instruments at their disposal. The possibility is shown that if the more populated country exports capital, a mutually advantageous harmonization of the rates of a source-based tax on capital can only take the form of a common subsidy rate. Furthermore, the transition from Cournot-Nash equilibria involving such a tax on capital to an equilibrium based on the pure residence principle is examined with the surprising result that under the same circumstances an agreement would be accepted only if it foresees transfer payments between the two countries.