| Abstract: | The international exchange of tax information, and its merits compared to withholding taxation, has emerged as a central topic in international tax policy. We characterize and compare the outcomes that emerge, in a two‐country world, with and without information exchange, under the assumption that countries are unable to tax residents and non‐residents differentially. The analysis focuses on the role of asymmetries in country size (capturing a key feature of tax havens) and on the impact and potential desirability of schemes to share the revenue raised by withholding (as under the new EU savings tax arrangements) or (more innovatively) as a consequence of information exchange. We show that, irrespective of any difference in country size, it is in the interests of both countries, in terms of tax revenue, that all revenue collected from non‐residents be transferred to the residence country—which would entail taking the EU practice even further from the norm, but is currently the standard in relation to information exchange. A withholding scheme with revenue fully reallocated in this way gives both countries more revenue than does information sharing, whatever the allocation under the latter. |
