Tax evasion, fiscal competition and economic integration

This paper examines the implications of tax evasion for fiscal competition and tax harmonization policies in an economic union. First, for symmetric countries, it proves that the equilibrium values of the tax and audit rates are less than optimal. Tax harmonization alone will also lead to a less than optimal audit rate. Second, for asymmetric countries, the paper shows that integration may turn an honest country into an evading one. It argues that tax harmonization alone may be a bad policy in that it can make both countries worse off. It may also cause an otherwise honest country to turn to evasion. (C) 2000 Elsevier Science B.V. All rights reserved.