Endogenous leadership and sustainability of enhanced cooperation in a repeated interactions model of tax competition: Endogenous leadership in tax competition

Abstract

In this study, the endogenous timing of moves is analyzed in an infinitely repeated game setting of capital tax competition between a subgroup (a tax union) of countries agreeing on partial tax harmonization and outside countries. It is shown that in a subgame perfect equilibrium of the infinitely repeated tax competition game, they simultaneously set capital taxes in every stage game when a tax union comprises similar countries with respect to productivity, whereas they may set capital taxes sequentially in every stage game when a tax union comprises dissimilar countries. This finding is significantly different from Ogawa (2013), although we also assume that capital is owned by the country's residents, as in Ogawa's model. This is because a disadvantaged member country of the tax union would suffer from larger losses when a tax union comprising dissimilar countries, and thus the tax union will choose the strategy of moving Late for the sake of sustaining tax harmonization to avoid such losses.