Summary

This paper provides a review of the tax competition literature. Early theory predicts that competition among regions over scarce capital will bid down taxes and expenditure to suboptimal levels. Later contributions have refined the analysis of tax competition to the extent that some models predict that taxes may actually increase as competition intensifies. Furthermore, the political economy branch of the tax competition literature has a favourable outlook on tax competition in that it is seen as curbing the rent-seeking activities of government officials.

Introduction

One of the major policy changes during the 80s and 90s was the liberalization of foreign exchange laws in many countries and the free mobility of capital that it fostered. The increased mobility of capital improved the worldwide allocation of resources and increased competition, thereby providing consumers and firms with more variety at lower prices. However, capital mobility also created competition over resources. Of particular concern is competition over internationally mobile tax bases such as capital. A fear among policy-makers is that openness may limit the scope for taxation and the ability to redistribute income among citizens as well as restrict the provision of public goods. In other words, if regions compete to attract mobile capital, the outcome of such competition could be a reduction in tax rates and public expenditure. This would mean that even if governments act in the best interest of their countries, tax competition is harmful since the fiscal externalities that arise from it lead to inefficiently low provision of public goods.

A different perspective on tax competition is taken by the public choice literature, which argues that tax competition may benefit countries and improve welfare through a reduction in wasteful government spending. 1See, for example, Brennan and Buchanan (1980) and Edwards and Keen (1996). This literature sees bureaucrats and politicians as rent-seekers who are not exclusively maximizing the welfare of voters. If government officials personally benefit from the budget they control, they have incentives to pursue activities that expand the welfare state beyond the desired level. 2See e.g., Niskanen (1971). There is substantial evidence for rent-seeking by government officials in many countries, as signified by the number of charges and convictions over corruption and pocketing of government owned cash. Another type of rent-seeking behaviour that rarely finds its way into courtrooms relates to ‘perks’ such the hiring of relatives and friends, fancy offices, business lunches, and fringe benefits. The importance of the public choice literature depends on how widespread rent-seeking activities are, the damage they do to the economy, and how increasing economic integration affects rent-seeking.

This paper reviews the literature on tax competition with the aim of establishing whether tax rates will fall due to the ‘forces’ of competition and if tax competition is harmful. The term tax competition is used to describe how capital taxes are set by independent governments that do not cooperate, and the effect of tax setting on national tax bases. A main finding of our investigation is that the literature is divided in its view on tax competition. While most models suggest that tax competition leads to lower tax rates on mobile factors, and this in turn is detrimental to the provision of public goods, other studies disagree. This is possible even when governments act solely in the interest of their own citizens. For example, lower tax rates sometimes have beneficial effects or tax competition leads to higher tax rates.

The Tiebout Hypothesis

The well-known term ‘voting with one’s feet’ originates from the first tax competition model and dates back to Tiebout (1956). His model examines competition among regions over mobile households. The Tiebout Hypothesis is that households will sort themselves among jurisdictions according to their preferences for the mix of taxes and public expenditures. In the ensuing equilibrium, the provision of public goods is efficient in the sense that a central authority cannot reallocate households among jurisdictions without making anyone worse off. This requires that there is a large enough number of jurisdictions for each individual to find its preferred tax-expenditure mix. The Tiebout model can easily be extended to a model where regions compete to attract mobile firms, and where the tax rate reflects the cost of providing public investment goods to firms. As in the Tiebout model, the outcome of tax competition leads to an efficient outcome in the sense that the marginal benefit of providing public inputs are equalized to the marginal cost. 3For a recent model as well a s survey of this literature see Wellisz (2000).

The Tiebout Hypothesis has been questioned, not least because it relies on a number of restrictive assumptions. Among these is the assumption that the government can collect a non-distortionary "head tax" from each resident equal to the cost of providing her with her preferred level of public goods. Other underlying assumptions are the absence of scale economies in public goods provision, and the large number of jurisdictions in order to obtain efficient sorting of individuals. The inclusion of firms in the Tiebout model does not rely on milder assumptions and also requires the use of non-distortionary taxes in the sense that lump sum taxes are necessary to ensure an efficient location of firms. In reality, the taxation of capital is inefficient and the sorting mechanisms required by the Tiebout model are not in place. The departure from the idealized settings of the Tiebout model implies that competition to attract mobile capital leads to fiscal externalities among countries that are at the heart of the analysis in modern models of tax competition.

The ‘standard’ tax competition model

The early contributions consider a country with many identical regions each playing host to competitive firms producing a single output by means of a fixed stock of mobile capital and an immobile factor fixed in supply. The latter could be interpreted as land or labor, and may give rise to pure profits. It is assumed that each region’s supply of a public good is financed entirely by a tax on capital employed within its borders (source tax). Tax policy affects the distribution of the world capital stock. A fundamental insight is that a rise in the capital tax rate of one region benefits other regions by increasing their capital supplies and, hence, their revenues. Put differently, a tax increase in one region causes a positive externality for other regions. However, the government in each region neglects these externalities since it is only concerned with the welfare of its own residents. The end result is that taxes are set too low resulting in underprovision of public goods levels, that is, an increase in all tax rates at the same time by a small amount would increase public goods supplies and hence welfare in all regions. 4See e.g. Zodrow and Mieszkowski (1986) and Wilson (1986).

An obvious way to alleviate the fiscal externalities that arise from competition over capital would be to impose capital controls that effectively closed each region’s border to factor mobility. However, this is not an attractive option to consider due to the administrative costs involved and problems of implementation. Furthermore, capital controls can be shown to be detrimental to welfare in a more general setting.

Note that the fiscal externality does not depend on the assumption that governments choose tax rates (and government spending adjusts to balance the budget). More realistically, one could argue that not only tax rates, but also the public goods levels could serve as strategic variables in the analysis of tax competition. It turns out that if regions engage in expenditure competition, where tax rates adjust to reflect the chosen budget level, the equilibrium level of public goods is even lower than in the models where the tax rate is the strategic variable. 5See Wildasin (1988). In what follows we investigate how relaxing the strict assumptions used in the early models affect the main conclusion.

Variable supply of capital A more appealing modification of the standard model is to allow the world stock of capital to be variable in supply, since taxation of capital potentially could have a detrimental effect on household savings behavior. Indeed, allowing for an endogenous supply of capital has the effect of reducing the amount of capital that flows out of a country that increases its tax rate. The consequence of this is that the arising fiscal externality is less pronounced than under an assumption of fixed capital supply. However, the fiscal externality still remains leading to wasteful tax competition through reductions in tax rates and public expenditure.

Multiple tax instruments. In reality governments have several tax instruments at its disposal. Allowing a tax on the immobile factor and assuming it suffices to finance the provision of the public good eliminates the problem at hand. Such a tax would be lump sum in nature and implies zero taxes on capital everywhere. As argued above, however, lump sum taxes are typically not available. More realistic is the assumption that production is undertaken by immobile, but elastically supplied labor and mobile capital. Since capital is infinitely elastic in supply in a small open economy, whereas the elasticity of labor supply is finite, the optimal policy is to set a zero tax on capital and collect all tax revenue from labor income. Even in this case regions will set the tax rate too low and collect too little tax revenue. 6See Bucovetsky and Wilson (1991). The mechanism at play is that a raise in the labor tax in one country reduces domestic labor supply and demand for capital. As a consequence, the amount of capital available for the other regions increases and drives up the productivity of labor and thus labor supply. This positive externality implies that all countries could be made better off by a joint increase in the tax on labor income. The absence of such a coordinating effort means that tax rates on capital and labor are too low and the public good underprovided.

Foreign (absentee) ownership Another modification to the standard model is to allow firms to be owned by foreigners. This amounts to an assumption that the return to the fixed factor is shared among domestic and foreign residents. Since the capital tax is capitalized into the return to the fixed factor, the burden of the tax is shared among foreign and domestic residents. This gives rise to a tax exporting effect. If the return to the fixed factor was solely collected by foreigners the incentive for tax exporting would induce regions to increase their tax rates in order to capture all returns derived by foreigners. In reality there is a mixture of home and foreign ownership, which means that allowing foreigners to collect some of the returns to the fixed factor dampens the incentive to compete for capital. The main message of harmful tax competition, however, remains intact. 7For a recent contribution see e.g. Huizinga and Sørensen (1998).

Double taxation The basic tax competition result is derived under the assumption that capital is taxed only at source. This is often motivated by the fact that foreign source income is difficult to monitor for domestic governments. An exception is the taxation of corporate income, in particular dividends distributed from a foreign subsidiary (located in the capital importing country) to its parent company (in the capital exporting country). In this case, typically both the host government of the subsidiary and the government of the parent tax the dividend income. Bond and Samuelson (1989) analyze in a two-country framework the strategic use of tax rates, which influence the terms of trade in the international capital market, to maximize national income. They consider two policies of the capital exporting country that mitigate the double taxation of dividends: a tax deduction (under which the parent company is allowed to deduct taxes paid abroad by its subsidiary) and a tax credit (under which foreign taxes are credited against the domestic tax due on the dividend up to a limit).

Bond and Samuelson show that in this setting tax rates under the tax credit regime are so high in the noncooperative equilibrium that capital ceases to flow. The basic intuition is that the capital-importing country always wants to raise its tax up to the capital-exporting country’s tax because this amounts to a nondistortionary redistribution of tax revenues from the exporting to the importing country. The capital exporting country on the other hand also raises its tax on foreign source income to discourage capital exports. In the end taxation becomes prohibitive. This result is challenged by Janeba (1995) on the ground that Bond and Samuelson assume that the government of the parent company levies differential tax rates on domestic income and foreign source income. If this is not possible, the tax rate of the capital exporting country declines to zero in equilibrium. Yet the equilibrium is not efficient because the tax of the capital-importing country distorts the world allocation of capital.

Public Input goods The early works on capital tax competition shows that tax rates are set too low in the competitive tax equilibrium in order to finance an efficient level of public consumption goods. These studies mostly neglect the fact that the public sector also provides public input goods. The distinction between these two types of goods is important to note. Public input goods, in contrast to public consumption goods, reduce the private costs of production or increase the marginal productivity of capital. Hence, the net ‘fiscal’ burden of a given tax is lower from the perspective of an international mobile investor. One main result is therefore that in equilibrium too much of a given government budget is spent on public inputs and too little on public consumption goods (Keen and Marchand (1997)).

Public goods spillover effects A third consideration that may mitigate the underprovision of public goods is the possibility that locally provided public goods have spillover effects across regions. Many types of public expenditure may affect utility in other regions. For instance, a reduction in national CO2-emissions may improve the international environment, publicly sponsored R&D efforts may benefit other countries through the transfer of technologies or ideas; a reduction in unemployment at home through expansive fiscal policies may reduce the unemployment abroad by increasing the demand for foreign goods, etc. By allowing for such spillover effects in the tax competition model one introduces a second source of undersupply, namely that of free-riding. Each regions expects that other regions spend resources on the common good. Intuitively, one might therefore expect the underprovision of public goods to be further aggravated. However, it turns out that this is not necessarily so. The reason is that spillover effects reduce the incentive to compete over capital since it becomes irrelevant who has the capital and supplies the goods. However, large spillovers increase the strength of the free riding problem and can therefore only reduce the undersupply of public goods but not alleviate it. > 8See e.g. Bjorvatn and Schjelderup (2001)

Large regions. The highly stylised model of competition over capital among many small regions is certainly valuable, but it is not the only description of the conditions under which competition for capital can occur. A realistic expansion of the standard model is to assume competition among regions that are large enough to influence the equilibrium after-tax return to capital. The literature models the outcome of such competition by assuming that each region sets its tax rate by assuming that the tax rates of the other regions are fixed (i.e., Nash behavior), but realizes that the equilibrium outcome depends on the action of itself and the other regions. Compared to a situation with many small countries competing for capital, the outcome of competition among a limited number of large regions is less severe since part of a tax increase by one region is capitalized into that region’s after tax return to capital. These theories indicate that if tax competition among small countries drives tax rates to zero, equilibrium tax rates will be positive if large regions compete. Nevertheless, tax rates are too low in equilibrium.

Small vs. large region. The literature models differences in size by assuming that each household owns a unit of capital, but that regions differ by population size (only). Per capita levels are therefore the same in each region, and imply that capital will not move between regions unless taxes differ. In this setting the literature finds that the small region has an incentive to underbid the large country. Since the large region is a large demander in the international capital market, a reduction in its tax rate ( t) will increase the after-tax return to capital ( r) substantially. The movement of capital across regions depends on the cost of capital, that is, r+ t, which means that a reduction in t has a modest effect on the cost of capital. As a result, the large country has weak incentives to bid for capital. In contrast, the small country cannot affect the after-tax return on capital and a reduction in its tax rate will therefore lower the cost of capital by a large amount. An important result in this context is that if the small country is sufficiently small, it sets a lower tax rate than the large country and attracts an over proportional share of the total capital stock. By doing so it ‘wins’ the competition for capital in that it can obtain higher per capita utility in equilibrium (Bucovetsky (1991) and Wilson (1991)).

Tax competition in the presence of other distortions

Most of the literature on tax competition, as reviewed so far, finds that mobility of capital leads to downward pressure on tax rates and hence to underprovision of public goods. The specific set of assumptions modifies how strong the fiscal externality is, but as long as governments maximize the welfare of a representative citizen it appears that tax rates are always too low. This need not be the case, as the following discussion indicates.

Commitment Problems When governments lack commitment power, mobility of firms can lead to lower equilibrium tax rates, like in the traditional literature, but this may be efficiency enhancing. In Janeba (2000) a multinational firm has to invest in capacity before production can take place. If the government lacks commitment power and taxes the firm only after the firm has made its investment (and before output is produced), a standard time-consistency problem arises: Once the firm has made its sunk investment, the government levies a high tax rate, which - when anticipated by the firm - leads to no investment because the firm is unable to recoup its investment cost. The problem is quite different if the firm has the option to invest in multiple countries even when all of them lack commitment power. By holding in several plants more capacity than necessary to serve the market, the firm can induce tax competition for capacity utilization. If tax rates come sufficiently down, the cost of investing in excess capacity are recouped.

Competing for firms The contributions in this genre assume competition between regions over large increments of capital, a large firm, say, or a whole industry (agglomerations). The underlying assumptions about country differences are what drive the outcome of tax competition in these models. For example, Haufler and Wooton (1999) study tax competition between two countries trying to attract a foreign-owned monopolist. The existence of trade costs and scale economies means that the firm will prefer to locate in the large market where it will be able to charge a higher producer price. The locational preference for the large country means that the taxing authority in this country is able to attract the firm at a lower cost than the small country. Haaparanta (1996) investigates a subsidy game between two countries that seek to attract inward foreign direct investment in order to alleviate domestic unemployment. In this model differences in national wage levels determine the outcome of tax competition. In Black and Hoyt (1989) regional differences in a non-labor cost component is the crucial component in a subsidy game between two regions trying to attract firms. Typical for these contributions is that although one region emerges as the ‘winner’ of the competition for firms, there is a downward pressure on tax rates. However, this does not necessarily lead to zero taxes.

Agglomerations and tax competition New trade theory provides a different view on the outcome of tax competition under economic integration. These studies use models of monopolistic competition to explain trade in similar products. Production is undertaken by use of labor and capital in the presence of scale economies. These studies find that tax competition does not lead to equal tax rates between regions and that the region that is the host to an industry (agglomeration) has an advantage. Since firms in the agglomeration earn a return above the average, the host country can tax away part of this return without driving the industry away. These theories indicate that any country playing host to an agglomeration can have higher taxes on capital than other countries on capital and that countries may gain from tighter economic integration. 9See Ludema and Wooton (2000) and Kind, Midelfart Knarvik, and Schjelderup (2000).

Imperfect Competition Capital mobility may lead to higher tax rates when markets are imperfectly competitive. This is shown by Janeba (1998) by reconsidering the strategic trade policy problem of Brander and Spencer (1985). Brander and Spencer show that if two firms, each located in a different country, compete by exporting to the world market, each government has a unilateral incentive to subsidize its firm’s exports. The subsidy basically acts like a commitment device to expand the firm’s market share. Since both governments have the same incentive, however, the two countries end up in an inefficient subsidy race. Janeba uses this framework, but allows firms to choose the location of production. The location decision depends on the subsidies (or taxes) offered by both governments. When governments cannot discriminate between the two firms, the noncooperative equilibrium entails zero subsidies/taxes. Thus mobility of firms leads to lower subsidies (or higher taxes) than in the case without mobility and both countries prefer the new outcome. The basic intuition for this result is that neither government wants to subsidize the other firm. The unilateral move from an equal subsidy to a slightly less generous subsidy means that outputs and profits are basically unchanged, but the change of the firms’ location reduces the subsidy bill. The outcome with mobility is not efficient because in an oligopolistic market output is either too high in the absence of consumer surplus considerations or too low when consumer surplus matters.

Political economics and tax competition

The public choice literature challenges the notion that competition to attract capital is harmful. The basic idea is that competition reduces the rent-seeking activities of government officials and may force a more efficient use of public funds. The literature can be divided into two categories. The first group of papers do not take into account electoral systems or re-election concerns. Rather, re-election concerns are implicitly assumed by modelling governments as partly benevolent and partly Leviathan. Hence, government officials are concerned in part with maximizing the public sector or by diverting some tax revenue for own consumption. Most of these papers find the outcome of tax competition on tax rates, public expenditures, and welfare to be ambiguous. >In essence, the outcome of tax competition depends on an assessment of the relative strength of Leviathan versus Benevolence (see e.g. Edwards and Keen (1996) and Rauscher (1998)). Making the weights given to these effects endogenous seems to be an important task. One would expect such an exercise to show that taxes would fall due to the competition over capital. Lower taxes and tax revenue, however, may not be negative. If the rents that government officials lay their hands on decrease more than tax revenue, the provision of public goods as well as voter utility would presumably increase. >

Gordon and Wilson (2001) provide a different angle on tax competition by assuming that residents initially set taxes, while rent seeking government officials thereafter decide on the distribution of expenditures. Hence, residents face the problem of providing incentives (salaries) to government officials that curb rent-seeking activities and induce benevolent behavior. Government officials cannot be ousted from office for poor performance through elections. They can, however, be fired if they spend more of their budget on perks than elsewhere. Another mechanism that serves to induce benevolent behavior is that residents can "vote with their feet" if they are displeased with the performance of government officials. A central property of this model is that influx of immigrants increases the tax base and leaves more room for rent seeking, but in order to attract immigrants in the first place, government officials must offer a ‘preferred package’ of public goods. Gordon and Wilson (2001) find that if residents can move between regions, competition to attract households reduces wasteful behavior by government officials, and increases public expenditure and resident utility. The increase in public expenditure comes at a cost. The equilibrium tax rates are above the rates that would be chosen by residents if regions could coordinate their tax policy, and public goods may still be underprovided.

The second part of the literature models tax competition in the presence of voting and there are different approaches to how this is done. Persson and Tabellini (1992) study a two-country model where each government levies a source tax on mobile capital to finance government transfers. This model generates the usual effect. A fall in the cost of investing abroad (i.e., increasing competition) puts downward pressure on tax rates. At the same time, however, there is a second, political effect in place since policy is chosen by a policymaker who represents the preferences of the median voter. Tax competition is shown to make the median voter select a more leftist government, whose distributional preferences call for higher taxes on capital, and this partly mitigates the tendency of tax competition to lower taxes on capital.

Biglaser and Mezzetti (1997) study how regions compete to attract large firms. Their starting point is the observation that some US states seem to offer ‘tax packages’ to firms that often exceed the ‘economic value’ of firm’s instate investment project. 10A prominent example is the Alabama state, which competed with 30 other states over a new Mercedes Benz factory. Alabama ended up offering Mercedes a package worth 330 million dollars for a plant expected to cost 300 million dollars. They assume that when preparing a bid, legislators take into account both the public’s interest and the bid’s impact on their probability of re-election. The competition among regions follows the rules of an English auction. 11Note that a benevolent legislator’s bid in an English auction is the same as the total value of the firm. Since politicians value their re-election, their bid for investments is distorted away from the value of the project to voters and may result in an inefficient location of firms in the sense that legislators give away too much of the taxpayers money in order to attract firms.

Conclusions

The modelling of tax competition over the years has been able to incorporate more features of real life. This in turn has made it less straightforward to predict the outcome of tax competition. A good example is the recognition among academics that the public sector also provides public input goods that have a positive effect on firm’s performance that may dampen the effect of tax competition. Furthermore, from the political branch of the tax competition literature comes the encouraging message that tax competition may increase welfare. In these models re-election concerns and the ‘forces’ of competition lead government officials to provide public good ‘packages’ that better suit the preferences of voters. A reasonable assessment of the literature is therefore that the literature is divided in its view on tax competition; taxes may fall but it is neither always a ‘race to the bottom,’ nor is a fall in tax rates always bad even when governments maximize the welfare of their own citizens.

A final question pertains to international coordination of tax policy and if such coordination can alleviate the effects of competition. Assuming that tax competition leads to lower taxes on capital and reduces welfare, it has been show that a group of countries (like the EU) as a whole can gain from reaching an agreement on harmonizing taxes even if the rest of the world does not follow suit. The gain from the harmonization effort will then depend on the strategic response from countries outside the agreement. Konrad and Schjelderup (1999) show that harmonization among a subset of countries increase welfare for all countries (i.e., both within and outside the harmonizing coalition) if tax rates are strategic complements. Strategic complementarity means that harmonizing tax rates by increasing the rate to a common level among the coalition partners triggers a tax increase by the countries not part of the harmonizing coalition. Huizinga and Sørensen (2000) show that a tax increase in a EU tax haven will increase welfare in the EU partner country, despite the presence of an outside tax haven. Finally, Sørensen (2000, 2001) carries out numerical simulations that indicate a gain to all EU countries if they coordinate their tax policy and increase capital tax rates. His simulations are shown to hinge on the basic result provided by Konrad and Schjelderup (1999). These studies, although small in numbers, lead us to conclude that there is support for the notion that international cooperation can alleviate the downward pressure in tax rates.

To conclude, our main findings in this paper are:

• Early theory predicts that competition among regions over scarce capital will bid down taxes and expenditure to suboptimal levels.
• Later contributions have refined the analysis of tax competition to the extent that some models predict that taxes may actually increase as competition intensifies.
• The political economy branch of the tax competition literature has a favourable outlook on tax competition, which is seen as an instrument for curbing the rent seeking activities of government officials
• Assuming that tax competition leads to inefficiently low taxes on capital and reduces welfare, tax coordination among a group of countries may improve welfare under certain conditions.

At last it should emphasized that we have not provided an extensive survey of the literature on agglomerations and tax competition. Nor have we analysed tax competition under conditions where the world economy is dominated by multinationals. Both these topics are of importance. For example, FDIs has grown rapidly throughout the world, with particular strong surges in the late 80s and 90s . Thus, a significant share of world trade is intra-firm trade (about 30%). At the end of 1997, the gross product (value added) of all multinational corporations including parent firms stood at an estimated $8 trillion, comprising roughly a quarter of the world's gross domestic product. 12World Investment Report 2000, Ch. 1, United Nations Later studies will address these issues extensively.

References

Biglaser, G., and C. Mezzetti, 1997. Politicans’ decision making with re-election concerns. Journal of Public Economics 66, 425-447.

Bjorvatn, K, and G. Schjelderup, 2001. Tax competition and international public goods. International Tax and Public Finance (forthcoming)

Black, D.A., and Hoyt, W.E., 1989. Bidding for firms. American Economic Review 79, 1249-1256.

Bond, E.W. and L. Samuelson, 1989. Strategic behavior and the rules for international taxation of capital. Economic Journal 99, 1099-1111.

Brander, J.A. and B.J. Spencer, 1985. Export subsidies and international market share rivalry. Journal of International Economics 18, 83-100.

Brennan, G., and J. Buchanan, 1980, The Power to Tax: Analytical Foundations of a Fiscal Constitution: Cambridge University Press.

Bucovetsky, S., 1991. Asymmetric tax competition. Journal of Urban Economics 30, 167-181.

Bucovetsky, S. and J. D. Wilson, 1991. Tax competition with two instruments. Regional Science and Urban Economics 96, 329-341.

Edwards, J., and M. Keen, 1996, Tax Competition and Leviathan, European Economic Review 44, 113-34.

Frenkel, J. A., A. Razin and E. Sadka, 1991. International Taxation in an Integrated World, MIT Press, Cambridge Mass.

Gordon, R.H., and J.D. Wilson, 2001, Expenditure Competition. NBER Working Paper 8189.

Haaparanta, P., 1996. Competition for foreign direct investment. Journal of Public Economics 63, 141-153.

Hartman, D. G., 1985. The welfare effects of a capital income tax in an open economy. NBER Working paper No. 1551.

Haufler, A., Wooton, I., 1999., Country size and tax competition for foreign direct investment. Journal of Public Economics 71, 121-139.

Huizinga, H. and Nielsen, S.B., 2000. The Taxation of Interest in Europe: Prospects for a Common European Policy. In Sijbren Cnossen (ed.): Taxing Capital in the European Union, Oxford University Press.

Janeba, E., 1995. Corporate income tax competition, double taxation treaties, and foreign direct investment. Journal of Public Economics 56, 311-325.

Janeba, E.,1998. Tax competition in imperfectly competitive markets. Journal of International Economics 44, 135-153.

Janeba, E., 2000. Tax competition when governments lack commitment: Excess capacity as a countervailing threat. American Economic Review 90, 1508-1519.

Keen, M., and M. Marchand, 1997. Fiscal competition and the pattern of public spending. Journal of Public Economics 63, 33-53.

Kind, H.J, K.H Midelfart Knarvik, and G. Schjelderup, 2000. Competing for capital in a lumpy world. Journal of Public Economics 78, 253-274.

Konrad, K. and G. Schjelderup, 1999. Fortress building in global tax competition. Journal of Urban Economics 46, 156-167.

Ludema, R.D, and I. Wooton. Economic Geography and the Fiscal Effects of Regional Integration. Journal of International Economics 52, 331-357.

Niskanen, W.A., 1971. Bureaucracy and Representative Government. Chicago: Aldine.

Persson, T. and G. Tabellini, 1992. The politics of 1992: Fiscal policy and European integration. Review of Economic Studies 59, 689-701.

Razin, A. and E. Sadka, 1991. Efficient investment incentives in the presence of capital flight. Journal of International Economics 31, 171-181.

Rauscher, M., 1998, Leviathan and Competition Among Jurisdictions: The Case of Benefit Taxation. Journal of Urban Economics 44, 59-67.

Sørensen, P.B., 2000. The case for international tax coordination reconsidered. Economic Policy 31, 429-472.

Sørensen, P.B., 2001. International tax coordination: Regionalism versus globalism. CESifo Working paper 438. University of Munich.

Tiebout, C.M, 1956. A pure theory of local expenditures. Journal of Political Economy 64, 416-24.

Wellisch, D., 2000. The theory of public finance in a federal state. New York: Cambridge University Press.

Wildasin, D.E., 1989. Nash equilibria in models of fiscal competition. Journal of Public Economics 35, 299-240.

Wildasin, D.E., 1991. Some rudimentary ‘duopolity’ theory. Regional Science an Urban Economics 21, 193-212.

Wildasin, D.E., and J.D. Wilson, 2001. Tax competition: bane or boon? Mimeo

Wilson, J.D., 1986. A theory of interregional tax competition. Journal of Urban Economics 19, 296-315.

Wilson, J.D., 1999. Theories of tax competition. National Tax Journal 52, 269-304.

Wilson, J.D., 1991. Tax competition with interregional differences in factor endowments. Regional Science and Urban Economics 21, 423-451.

G. Zodrow and P. Mieszkowski, 1986. Pigou, Tiebout, property taxation and the underprovision of local public goods. Journal of Urban Economics 19, 356-370.