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Capital Tax Competition and Returns to Scale

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  • John Burbidge
  • Katherine Cuff

Abstract

There is a gap between the predictions of capital tax competition models and the reality they purport to describe. In a standard capital-tax model, with head taxes, capital-importing regions tax capital and capital-exporting regions subsidize capital. In the real-world, competing regions appear to subsidize capital whether or not they are capital importers. We show that by relaxing the standard assumption of constant returns to scale symmetric regions in a Nash equilibrium may all subsidize capital.We also prove that any ine¢ciencies in a non-symmetric Nash equilibria arise entirely from regions’ incentives to manipulate the terms of trade, and not from increasing returns.We also compare our results to those in captial tax competition models without head taxes.

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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2002-10.

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Length: 19 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:mcm:deptwp:2002-10

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  1. Fujita, Masahisa & Thisse, Jacques-François, 1996. "Economics of Agglomeration," CEPR Discussion Papers 1344, C.E.P.R. Discussion Papers.
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  7. John Burbidge & Katherine Cuff, 2002. "Capital Tax Competition and Returns to Scale," Department of Economics Working Papers 2002-10, McMaster University.
  8. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June Cita.
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  18. Teresa Garcia-Milà & Therese J. McGuire, 2001. "Tax incentives and the city," Economics Working Papers 631, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2001.
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Citations

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Cited by:
  1. Fernandez, Gonzalo E., 2005. "A note on tax competition in the presence of agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 837-847, November.
  2. Burbidge, John & Cuff, Katherine, 2005. "Capital tax competition and returns to scale," Regional Science and Urban Economics, Elsevier, vol. 35(4), pages 353-373, July.
  3. John Burbidge & Katherine Cuff & John Leach, 2004. "Capital Tax Competition with Heterogeneous Firms and Agglomeration Effects (new title: Tax competition with heterogeneous firms)," CESifo Working Paper Series 1277, CESifo Group Munich.
  4. Matthias Wrede, 2008. "Agglomeration, tax competition, and fiscal equalization," MAGKS Papers on Economics 200818, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  5. Alexei Alexandrov & Özlem Bedre-Defolie, 2011. "Sales tax competition and a multinational with a decreasing marginal cost," ESMT Research Working Papers ESMT-11-01, ESMT European School of Management and Technology.
  6. Yutao Han, 2013. "Who benefits from partial tax coordination?," CREA Discussion Paper Series 13-24, Center for Research in Economic Analysis, University of Luxembourg.
  7. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
  8. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
  9. Mario Jametti & Marius Brülhart & Kurt Schmidheiny, 2007. "Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials?," Working Papers 2007_9, York University, Department of Economics.
  10. Wei-Bin Zhang, 2011. "Economic growth with space and fiscal policies with housing and public goods," Journal of Economic Studies, Emerald Group Publishing, vol. 38(4), pages 452-482, September.
  11. Jofre-Monseny, Jordi & Solé-Ollé, Albert, 2012. "Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of employment location to local taxes," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 257-268.
  12. Han, Yutao & Pieretti, Patrice & Zou, Benteng, 2014. "Does size asymmetry exacerbate the inefficiency of tax competition?," Economics Letters, Elsevier, vol. 122(1), pages 16-18.
  13. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.
  14. Luca Barone, 2013. "An ABM for Economics: Micro Explains Macro," Working papers 016, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.

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