This paper studies tax competition in a setting that allows for agglomeration economies and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation, with this rate being too low from a social point of view. Tighter integration of markets leads to an intensification of competition, a drop in Nash tax rates, and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax difference in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of the big and small nations' industry; by lowering tax rates, the small nation can attract high-productivity firms.
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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number
237.
Find related papers by JEL classification: H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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