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Tax Competition and the Nature of Capital

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  • Baldwin, Richard
  • Forslid, Rikard

Abstract

The standard race-to-the-bottom result is curious in one respect. If a nation wants to attract foreign capital, providing the optimal level of public amenities (and thus charging the optimal tax rate) would seem optimal. This conjecture fails in the standard tax competition model since foreign capital ignores host nation amenities. While this assumption is reasonable for physical capital, other forms of capital (human capital) tend to move with their owner, so amenities matter. We show that when factors move with their owners, symmetric international tax competition may leads to the socially optimal rate. This result can be thought of as a corollary of the Tiebout efficiency hypothesis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3607.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3607

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Keywords: tax competition; tiebout hypothesis;

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  1. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June Cita.
  2. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  3. 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.
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  5. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  6. Signe Krogstrup, 2002. "What do Theories of Tax Competition Predict for Capital Taxes in EU Countries? A Review of the Tax Competition Literature," IHEID Working Papers 05-2002, Economics Section, The Graduate Institute of International Studies.
  7. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  8. WILDASIN, David E., . "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," CORE Discussion Papers RP -831, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Wildasin, David E., 1991. "Some rudimetary 'duopolity' theory," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 393-421, November.
  10. Eckard Janeba, . "Tax Competition in Imperfectly Competitive Markets," Discussion Paper Serie A 513, University of Bonn, Germany.
  11. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  12. Roger H. Gordon, 1982. "An Optimal Taxation Approach to Fiscal Federalism," NBER Working Papers 1004, National Bureau of Economic Research, Inc.
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Cited by:
  1. Riou, Stephane, 2006. "Transfer and tax competition in a system of hierarchical governments," Regional Science and Urban Economics, Elsevier, vol. 36(2), pages 249-269, March.

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