Agglomeration, Integration and Tax Harmonization

Richard Baldwin and Paul Krugman ()

No 2630, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper considers tax competition and tax harmonization in the presence of agglomeration forces and falling trade costs. With agglomerative forces operating, industry is not indifferent to location in equilibrium, so perfectly mobile capital becomes a quasi-fixed factor. This suggests that the tax game is something subtler than a race to the bottom. Advanced 'core' nations may act like limit-pricing monopolists toward less advanced 'periphery' countries. Consequently, integration need not lead to falling tax rates, and might well be consistent with the maintenance of large welfare states. ‘Limit taxing’ also means that simple tax harmonization – adoption of a common tax rate – always harms at least one nation and adoption of a rate between the two unharmonized rates harms both nations. A tax floor set at the lowest equilibrium tax rate leads to a weak Pareto improvement.

Keywords: Economic Geography; Tax Competition; Tax Harmonization; Trade (search for similar items in EconPapers)
JEL-codes: F12 F20 H00 H87 (search for similar items in EconPapers)
Date: 2000-11
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Related works:
Working Paper: Agglomeration, Integration and Tax Harmonization (2001)
Working Paper: Agglomeration, Integration and Tax Harmonization (2002)
Journal Article: Agglomeration, integration and tax harmonisation (2004)
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