In the introduction to his recent book Taxation in an Integrating World (1995) 2 Vito Tanzi raises important questions concerning tax policies in the world economic system. He states:
In a world that continues to be organized into nations and in which tax systems are national in scope and there is no international tax authority, what will be the implication of the internationalization of economic activities for those tax systems? How will countries react to crossborder spillovers, to their diminished national authority, and to the challenges to their political sovereignty that deep integration will bring? Will countries recognize the benefits of collaboration or will they try to go it alone? In which areas and for which countries will collaboration be a preferred response? Where will competition be chosen? What will be the consequences of choosing one strategy over the other?
These perceptive and insightful questions reflect Tanzi’s ongoing interest in the fundamental issues underpinning the analytics and the practical aspects of tax policies and tax systems. They pose important challenges to policy makers and academic economists alike and, in a fundamental sense, they set the research agenda for scholars in public economics. Fortunately, the inquiry pursued to meet these intellectual-practical challenges will not be carried out in an unchartered territory, as Vito Tanzi’s own work has made a significant contribution to provide answers to these questions.
In this chapter we develop an exposition of an analytical framework that links together a broad range of tax policies and tax structures. The analysis highlights the interaction among the formulation and effects of a variety of taxes, such as direct and indirect taxes, trade and domestic taxes as well as issues in microeconomics such as debt versus tax-financed government spending. The main purpose of the chapter is to develop and highlight