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Capital Tax Competition and Returns to Scale

Author

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  • John Burbidge

    (Department of Economics, University of Waterloo)

  • Katherine Cuff

    (Department of Economics, McMaster University)

Abstract

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.

Suggested Citation

  • John Burbidge & Katherine Cuff, 2002. "Capital Tax Competition and Returns to Scale," Working Papers 03002, University of Waterloo, Department of Economics, revised Sep 2003.
  • Handle: RePEc:wat:wpaper:03002
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    Cited by:

    1. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
    2. Robin Boadway & Katherine Cuff, 2017. "The impressive contribution of Canadian economists to fiscal federalism theory and policy," Canadian Journal of Economics, Canadian Economics Association, vol. 50(5), pages 1348-1380, December.
    3. Alexei Alexandrov & Özlem Bedre-Defolie, 2011. "Sales tax competition and a multinational with a decreasing marginal cost," ESMT Research Working Papers ESMT-11-01, ESMT European School of Management and Technology.
    4. Matthias Wrede, 2014. "Asymmetric tax competition with formula apportionment," Letters in Spatial and Resource Sciences, Springer, vol. 7(1), pages 47-60, March.
    5. 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.
    6. Signe Krogstrup, 2008. "Standard Tax Competition and Increasing Returns," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(4), pages 547-561, August.
    7. Brülhart, Marius & Bucovetsky, Sam & Schmidheiny, Kurt, 2015. "Taxes in Cities," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 1123-1196, Elsevier.
    8. Marius Brülhart & Mario Jametti & Kurt Schmidheiny, 2012. "Do agglomeration economies reduce the sensitivity of firm location to tax differentials?," Economic Journal, Royal Economic Society, vol. 122(563), pages 1069-1093, September.
    9. Sandy Fréret & Denis Maguain, 2017. "The effects of agglomeration on tax competition: evidence from a two-regime spatial panel model on French data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 1100-1140, December.
    10. Yutao Han & Xi Wan, 2019. "Who benefits from partial tax coordination?," The World Economy, Wiley Blackwell, vol. 42(5), pages 1620-1640, May.
    11. Wei‐Bin Zhang, 2008. "Growth and residential distribution with economic structure and amenity: A synthesis of Solow‐Uzawa's growth, Alonso's urban, and Muth's housing models," Papers in Regional Science, Wiley Blackwell, vol. 87(2), pages 277-303, June.
    12. Matthias Wrede, 2014. "Agglomeration, tax competition, and fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 1012-1027, December.
    13. Yutao Han, 2013. "Who benefits from partial tax coordination?," DEM Discussion Paper Series 13-24, Department of Economics at the University of Luxembourg.
    14. Han, Yutao & Pieretti, Patrice & Zou, Benteng, 2014. "Does size asymmetry exacerbate the inefficiency of tax competition?," Economics Letters, Elsevier, vol. 122(1), pages 16-18.
    15. Jofre-Monseny, Jordi & Solé-Ollé, Albert, 2012. "Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of employment location to local taxes," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 257-268.
    16. Taiki Susa, 2014. "Capital allocation in an asymmetric tax competition model with agglomeration economies," Letters in Spatial and Resource Sciences, Springer, vol. 7(3), pages 185-193, October.
    17. Jordi Jofre-Monseny, 2010. "Is agglomeration taxable?," Working Papers 2010/15, Institut d'Economia de Barcelona (IEB).
    18. Matthias Wrede, 2014. "Agglomeration, tax competition, and fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 1012-1027, December.
    19. John Burbidge & Katherine Cuff & John Leach, 2004. "Capital Tax Competition with Heterogeneous Firms and Agglomeration Effects (new title: Tax competition with heterogeneous firms)," CESifo Working Paper Series 1277, CESifo.
    20. Luca Barone, 2013. "An ABM for Economics: Micro Explains Macro," Working papers 016, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    21. Fernandez, Gonzalo E., 2005. "A note on tax competition in the presence of agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 837-847, November.
    22. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.

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    More about this item

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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