Increasing Returns in a Standard Tax Competition Model

Signe Krogstrup

No 02-2004, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: The standard tax competition literature predicts a race to the bottom in capital tax rates as capital mobility increases. Recently, the very different modeling framework of the new economic geography literature has produced the contrasting result that economic integration leads to agglomeration rents to capital which can be taxed away, in turn leading to higher corporate taxation. This paper incorporates increasing returns directly into the standard tax competition modeling framework to identify the origin of this disparity of results. The model illustrates that increasing returns reduce traditional tax competition pressures as capital mobility increases, and that changes in preferences for the public good, combined with increasing cross-border ownership of capital, and thus taxexporting incentives, are the main factors driving tax rates higher. Tax exporting has not previously been linked endogenously to capital mobility in standard tax competition models or new economic geography models.

Keywords: Tax competition; Capital mobility; Economic Geography; Increasing Returns; Tax Exporting. (search for similar items in EconPapers)
Pages: 27
Date: 2004-06-10
New Economics Papers: this item is included in nep-pbe and nep-ure
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