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Agglomeration, Integration and Tax Harmonization

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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 that simple tax harmonization - adoption of a common tax rate - always harms at least one nation and adoption of a rate between the two unharmonised 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

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 01-2001.

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Length: 25
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:gii:giihei:heiwp01-2001

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Keywords: Tax Competition; Tax Harmonization; New Economic Geography; Geography; Agglomeration; Trade; European Integration;

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  1. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  2. Paul Krugman, 1992. "Geography and Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610868, December.
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  11. repec:fth:iniesr:430 is not listed on IDEAS
  12. Krugman, Paul & Venables, Anthony J., 1994. "Globalization and the Inequality of Nations," CEPR Discussion Papers 1015, C.E.P.R. Discussion Papers.
  13. Eckard Janeba, . "Tax Competition in Imperfectly Competitive Markets," Discussion Paper Serie A 513, University of Bonn, Germany.
  14. 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-.
  15. Rikard Forslid & Gianmarco I.P. Ottaviano, 2003. "An analytically solvable core-periphery model," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 229-240, July.
  16. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  17. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  18. 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.
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