Fortress building in global tax competition

This paper studies whether a group of countries can gain from harmonizing t heir capital income taxes if the rest of the world does not follow suit. It is shown that cooperation among the subgroup of countries is beneficial if tax rates in the initial fully noncooperative Nash equilibrium are strateg ic complements. In this case tax harmonization among a subset of countries is Pareto improving for all countries. (C) 1999 Academic Press.