Tax Competition and Partial Coordination

To determine the welfare effects of tax coordination, it is often assumed that one tax is jointly increased and all other policy instruments are held constant. This paper, in contrast, analyzes partial coordination in the sense that each country can still adjust another tax, which is not subject to coordination. In a model with capital and labor taxation, we show that under plausible assumptions the welfare effect of coordinating the capital tax only is then still nonnegative. For a partial coordination of the labor tax, however, the results become ambiguous and depend on the labor-supply elasticity.