Implementing tax coordination

This paper investigates whether tax competition can survive under tax coord ination, when information is private or nonverifiable. We focus on a two-ju risdiction model where capital can move across borders, and where jurisdict ions have different public good requirements, but are otherwise identical. In this setting, coordination may call for a second-best allocation support ed by differentiated tax rates. If,however, coordination must be achieved v ia a set of common rules that condition tax rates on jurisdictions' choices , the second-best allocation may not be implementable. We show that incenti ve compatibility requirements will generally affect not only the choice of coordinated rates in states where jurisdictions are different, but also the choice of harmonized rates in states where jurisdictions have identical pr eferences for public consumption. (C) 1999 Elsevier Science S.A. All rights reserved.