Externalities of Non-Cooperative Tax Policy in the Globally Integrated Market *

This paper investigates efficiency losses caused by independent tax systems, and proposes ways of remedying this coordination failure. Whereas the harmful effects of tariff competition have been thoroughly explored in the trade policy literature, little is known about the externalities that result from jurisdictional corporate tax policies on the trade of multinational companies. I show that cooperative tax policy with self-interested governments has the potential for increasing not only the levels of tax revenues and corporate profits but also the volume of trade through a more efficient allocation of tax burden