Is tax harmonization useful?

It is a widely acknowledged result of the literature on international tax c ompetition that an inefficient provision of public goods can only be avoide d, if taxes are sufficiently coordinated. In this paper we use a model wher e governments use commodity and factor taxes in the tax competition game. W e show that governments will always choose a second-best efficient tax stru cture in the Nash equilibrium if they have access to a residence-based capi tal tax and either a destination-based commodity tax or a labor tax. Moreov er, we show that tax competition need not foreclose third-best efficiency i n a world with a restricted tax policy toolkit.