We analyze the competition in bonus taxation when banks compensate their managers by means of fixed and incentive pay and bankers are internationally mobile. Banks choose bonus payments that induce excessive managerial risk-taking to maximize their private benefits of existing government bailout guarantees. In this setting the international competition in bonus taxes may feature a u2018race to the bottomu2019 or a u2018race to the topu2019, depending on whether bankers are a source of net positive tax revenue or inflict net fiscal losses on taxpayers as a result of incentive pay. A u2018race to the topu2019 becomes more likely when governmentsu2019 impose only lax capital requirements on banks, whereas a u2018race to the bottomu2019 is more likely when bank losses are partly collectivized in a banking union.
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