INTERGOVERNMENTAL POLICY ON MULTINATIONAL CORPORATIONS: A Simple Model of Tax Bargaining

Multinational corporations can play off host governments to minimise their tax payments in the absence of internationally coordinated fiscal policies. Without a supranational enforcement agency, most tax harmonization policies are unstable because one or another signatory always has an incentive to break ranks. This produces a sub‐optimal tax harvest for a group of host governments taken as a whole. This is a collective action problem for host governments which can be stated in the form of a Prisoner's Dilemma supergame. Equilibrium cooperative solutions have been suggested for this game which do not need higher authorities to enforce them. The application of these solutions to the host governments’ tax problem is discussed, with the conclusion that under certain conditions self‐policing tax harmonization agreements are possible.