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Increasing Returns in a Standard Tax Competition Model

The standard tax competition literature predicts a race to the bottom in capital tax rates as capital mobility increases. Recently, the very different modeling framework of the new economic geography literature has produced the contrasting result that economic integration leads to agglomeration rents to capital which can be taxed away, in turn leading to higher corporate taxation. This paper incorporates increasing returns directly into the standard tax competition modeling framework to identify the origin of this disparity of results. The model illustrates that increasing returns reduce traditional tax competition pressures as capital mobility increases, and that changes in preferences for the public good, combined with increasing cross-border ownership of capital, and thus taxexporting incentives, are the main factors driving tax rates higher. Tax exporting has not previously been linked endogenously to capital mobility in standard tax competition models or new economic geography models.

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Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 02-2004.

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Length: 27
Date of creation: 10 Jun 2004
Date of revision:
Handle: RePEc:gii:giihei:heiwp02-2004
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  1. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
  2. Kind, Hans Jarle & Schjelderup, Guttorm & Ulltveit-Moe, Karen-Helene, 1999. "Competing for Capital in a 'Lumpy' World," CEPR Discussion Papers 2188, C.E.P.R. Discussion Papers.
  3. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  4. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February.
  5. Fredrik Andersson & Rikard Forslid, 2000. "Tax Competition and Economic Geography," Econometric Society World Congress 2000 Contributed Papers 1356, Econometric Society.
  6. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
  7. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  8. Ottaviano, Gianmarco & van Ypersele, Tanguy, 2002. "Market Access and Tax Competition," CEPR Discussion Papers 3638, C.E.P.R. Discussion Papers.
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