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Gains and Losses from Tax Competition with Migration

  • Honkapohja ,S.
  • Turunen-Red, A.

We consider international labour (entrepreneur) mobility in a two-country overlapping-generations model. Interactions of decreasing and increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments have a unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equlibrium in taxes under full labour mobility to the closed economy with no mobility. Despite strategic tax setting, the free mobility outcome is often better in welfare terms. Large, discrete gains in welfare may be attained because of the tax competition. Expectational barriers for discrete welfare improvements can be overcome through tax competition.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0416.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0416.

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Length: 36
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:cam:camdae:0416
Note: Ma, PE
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Hans-Werner Sinn, 2002. "The New Systems Competition," NBER Working Papers 8747, National Bureau of Economic Research, Inc.
  2. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  3. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
  4. David E. Wildasin, 2000. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," Economic Policy, CEPR;CES;MSH, vol. 15(31), pages 337-378, October.
  5. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  6. Persson, Torsten & Tabellini, Guido, 1992. "The Politics of 1992: Fiscal Policy and European Integration," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 689-701, October.
  7. Sinn, Hans-Werner, 2002. "EU enlargement and the future of the welfare state," Munich Reprints in Economics 19736, University of Munich, Department of Economics.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  9. Breyer, Friedrich & Kolmar, Martin, 2002. "Are national pension systems efficient if labor is (im)perfectly mobile?," Journal of Public Economics, Elsevier, vol. 83(3), pages 347-374, March.
  10. Seppo Honkapohja & Arja Turunen-Red, 2002. "Complementarity, growth, and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 495-516, August.
  11. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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