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Agglomeration, integration and tax harmonisation

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  • Baldwin, Richard E.
  • Krugman, Paul

Abstract

This Paper considers tax competition and tax harmonization in the presence of agglomeration forces and falling trade costs. With agglomerative forces operating, industry is not indifferent to location in equilibrium, so perfectly mobile capital becomes a quasi-fixed factor. This suggests that the tax game is something subtler than a race to the bottom. Advanced 'core' nations may act like limit-pricing monopolists toward less advanced 'periphery' countries. Consequently, integration need not lead to falling tax rates, and might well be consistent with the maintenance of large welfare states. ‘Limit taxing’ also means that simple tax harmonization – adoption of a common tax rate – always harms at least one nation and adoption of a rate between the two unharmonized rates harms both nations. A tax floor set at the lowest equilibrium tax rate leads to a weak Pareto improvement.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 48 (2004)
Issue (Month): 1 (February)
Pages: 1-23

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Handle: RePEc:eee:eecrev:v:48:y:2004:i:1:p:1-23

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References

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  1. Fredrik Andersson & Rikard Forslid, 2003. "Tax Competition and Economic Geography," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 279-303, 04.
  2. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
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  6. Krugman, Paul & Venables, Anthony J., 1994. "Globalization and the Inequality of Nations," CEPR Discussion Papers 1015, C.E.P.R. Discussion Papers.
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  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  10. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
  11. Ludema, Rodney D & Wooton, Ian, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," CEPR Discussion Papers 1822, C.E.P.R. Discussion Papers.
  12. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  13. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  14. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  15. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
  16. Kind, H.J. & Midelfart Knarvik, K.H. & Schjelderup, G., 1998. "Industrial Agglomeration and Capital Taxation," Papers 7/98, Norwegian School of Economics and Business Administration-.
  17. repec:fth:iniesr:430 is not listed on IDEAS
  18. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
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