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Agglomeration, Integration and Tax Harmonization

  • Baldwin, Richard
  • Krugman, Paul

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 simple tax harmonization – adoption of a common tax rate – always harms at least one nation and adoption of a rate between the two unharmonized rates harms both nations. A tax floor set at the lowest equilibrium tax rate leads to a weak Pareto improvement.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2630.

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Date of creation: Nov 2000
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Handle: RePEc:cpr:ceprdp:2630
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  1. Forslid, Rikard & Andersson, Fredrik, 1999. "Tax Competition and Economic Geography," Research Papers in Economics 2000:5, Stockholm University, Department of Economics.
  2. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
  3. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  4. Baldwin, Richard E., 2001. "Core-periphery model with forward-looking expectations," Regional Science and Urban Economics, Elsevier, vol. 31(1), pages 21-49, February.
  5. Forslid, Rikard, 1999. "Agglomeration with Human and Physical Capital: an Analytically Solvable Case," CEPR Discussion Papers 2102, C.E.P.R. Discussion Papers.
  6. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
  7. Krugman, Paul R & Venables, Anthony J, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 857-80, November.
  8. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  10. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  11. Janeba, Eckhard, 1998. "Tax competition in imperfectly competitive markets," Journal of International Economics, Elsevier, vol. 44(1), pages 135-153, February.
  12. 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.
  13. Flam, Harry & Helpman, Elhanan, 1987. "Industrial policy under monopolistic competition," Journal of International Economics, Elsevier, vol. 22(1-2), pages 79-102, February.
  14. 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, June.
  15. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
  16. Paul Krugman, 1992. "Geography and Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610868, June.
  17. 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-.
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