International tax competition with endogenous sequencing

This paper examines endogenous timing in an international tax competition model. Unlike existing studies, governments are assumed to decide not only tax rates but also whether they are set early or late. The Nash equilibrium provides four conclusions for alternative double tax allowances. The findings resolve the question raised by Bond and Samuelson (1989) of why governments choose tax credits that eliminate capital trade when tax deductions are clearly better. First, all countries have a first-move advantage under a deduction regime, whereas at least one country would have a second-move advantage under a credit approach. Second, tax deductions cause simultaneous tax competition, whereas tax credits yield sequential tax competition. Third, any tax rules would generate capital trade. Fourth, one country is better off but another is worse off with credits than deductions.