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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. 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.
  2. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," Working Papers 9809, Business School - Economics, University of Glasgow.
  3. 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.
  4. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer, vol. 10(3), pages 259-80, May.
  5. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  6. Wildasin, D.E., 1987. "Nash equilibria in models of fiscal competition," CORE Discussion Papers 1987020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  8. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  9. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  10. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
  11. John Burbidge & Katherine Cuff, 2002. "Capital Tax Competition and Returns to Scale," Working Papers 03002, University of Waterloo, Department of Economics, revised Sep 2003.
  12. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  13. Robin Boadway & Katherine Cuff & Nicolas Marceau, 2004. "Agglomeration Effects and the Competition for Firms," International Tax and Public Finance, Springer, vol. 11(5), pages 623-645, 09.
  14. Fujita, Masahisa & Thisse, Jacques-François, 1996. "Economics of Agglomeration," CEPR Discussion Papers 1344, C.E.P.R. Discussion Papers.
  15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  16. 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.
  17. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
  18. 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.
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