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Capital Tax Competition and Returns to Scale

  • John Burbidge

    (Department of Economics, University of Waterloo)

  • Katherine Cuff

    (Department of Economics, McMaster University)

That some capital importing regions subsidize units of capital is inconsistent with the standard models of the capital tax competition literature. We maintain the assumption of capital homogeneity and relax the assumption of constant returns to scale. Among other things, we show that symmetric regions in a Nash equilibrium may subsidize capital as may a capital importing region in an asymmetric Nash equilibrium. We also prove that any ine.ciencies in asymmetric Nash equilibria with both capital and head taxes arise entirely from regions’ incentives to manipulate the terms of trade, and not from increasing returns. We also show the result that small regions win tax competitions in Nash equilibria with capital taxes only may not hold with increasing returns.

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Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number 03002.

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Date of creation: Aug 2002
Date of revision: Sep 2003
Handle: RePEc:wat:wpaper:03002
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  1. Kind, H.J. & Knarvik, K.H.M. & Schjelderup, G., 1999. "Competing for Capital in a "Lumpy" World," Papers 7/99, Norwegian School of Economics and Business Administration-.
  2. 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.
  3. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  4. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  5. John Burbidge & Katherine Cuff, 2002. "Capital Tax Competition and Returns to Scale," Department of Economics Working Papers 2002-10, McMaster University.
  6. Rodney D. Ludema & Ian Wooton, 1998. "Economic Geography and the Fiscal Effects of Regional Integration," International Trade 9801001, EconWPA.
  7. 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.
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. Fujita, M. & Thisse, J.-F., . "Economics of agglomeration," CORE Discussion Papers RP -1250, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. 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.
  11. Black, Dan A & Hoyt, William H, 1989. "Bidding for Firms," American Economic Review, American Economic Association, vol. 79(5), pages 1249-56, December.
  12. 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).
  13. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, 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, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  16. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  17. 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.
  18. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September.
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