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Capital Tax Competition and Returns to Scale

  • John Burbidge
  • Katherine Cuff

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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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2002-10.pdf
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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. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2003. "Agglomeration Effects and the Competition for Firms," Cahiers de recherche 0324, CIRPEE.
  2. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  3. 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.
  4. Kind, Hans Jarle & Knarvik, Karen Helene Midelfart & Schjelderup, Guttorm, 2000. "Competing for capital in a 'lumpy' world," Journal of Public Economics, Elsevier, vol. 78(3), pages 253-274, November.
  5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  6. Fujita, Masahisa & Thisse, Jacques-Francois, 1996. "Economics of Agglomeration," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 339-378, December.
  7. Scoones, David & Wen, Jean-Francois, 2001. " Common and Private Values of the Firm in Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 3(4), pages 373-89.
  8. 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.
  9. John B. Burbidge & James A. DePater & Gordon M. Myers & Abhijit Sengupta, 1996. "A Coalition-formation Approach to Equilibrium Federations and Trading Block s," Department of Economics Working Papers 1996-05, McMaster University.
  10. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  11. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  12. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
  13. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  14. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
  15. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
  16. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  17. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  18. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
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