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) tends to move with its 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 Stockholm University, Department of Economics in its series Research Papers in Economics with number
2002:18.
Length: 9 pages Date of creation: Jul 2002 Date of revision: Handle: RePEc:hhs:sunrpe:2002_0018
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Find related papers by JEL classification: F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies F20 - International Economics - - International Factor Movements and International Business - - - General H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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