Departmental Bulletin Paper Does Endogenous Timing Matter in Implementing Partial Tax Harmonization?

Itaya, Jun-ichi  ,  Yamaguchi, Chikara

286pp.1 - 34 , 2015-06 , Graduate School of Economics and Business Administration, Hokkaido University
The endogenous timing of moves is analyzed in a repeated game setting of capital tax competition, where a subgroup of countries implementing partial tax harmonization and outside countries choose whether to set capital taxes sequentially or simultaneously. It is shown that the simultaneous-move outcome prevails in every stage game of the infinitely repeated tax-competition game as its subgame-perfect Nash equilibrium (SPNE) if a taxunion consists of similar countries, whereas both the simultaneous-move and sequentialmove (Stackelberg) outcomes can be sustained as SPNEs when a tax-union consists of dissimilar countries. This is in sharp contrast with the finding of Ogawa (2013). In his two-stage game, when asymmetric countries in terms of productivity have opposite incentives towards the terms of trade in order to manipulate the price of capital in their favor, there exists only a simultaneous-move Nash equilibrium. This difference arises from the fact that infinite repetition is able to support a wider range of behavior that is not a Nash equilibrium of the one-shot stage game of the repeated tax-competition game, such as a Stackelberg follower’s strategy.

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