Capital Tax Competition and Returns to Scale

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.