Tax competition between two countries is considered in a trade-and-location setting with differentiated products and monopolistic competition. There are two groups of workers, mobile ones and immobile ones. Taxes are used for producing a public good. It is shown that an equilibrium with mobile workers dispersed across countries is destabilized by increased taxes on these mobile workers-even for perfectly coordinated tax increases. It is also shown that while tax competition gives rise to standard distortions in a tax-competition game when mobile workers are dispersed, different distortions result when they are concentrated in one country. Copyright 2003 Blackwell Publishing Inc..
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David E. Wildasin, 2005.
"Fiscal Competition,"
Working Papers
2005-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
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