Competition vs. cooperation in international taxation

Tax competition was criticized for many of the problems of the international tax regime. The decentralized structure of the regime pushes states to compete in offering their public goods and services for a competitive tax “price”. Under tax competition, it was argued, states race their tax rates to a suboptimal bottom which prevents them from efficiently providing public goods and undermines their ability to promote their normative goals. In particular, it prevents states from promoting domestic distributive justice. Cooperation among states is often promoted as the solution for the maladies of tax competition. Cooperation can allow states to increase their tax rates and thus offer more desirable public goods and services and increase their ability to promote their normative goals. This, however, may come at a cost for developing countries. This chapter describes the marketized and fragmented nature of the current competitive tax regime, highlights the inherent problems this structure brings with it. It then explains why cooperation, despite its laudable reputation may create inefficiencies as well as injustices of its own. The chapter offers to treat cooperation with caution and embrace competition as a useful tool in promoting the normative goals of international taxation.