Agglomeration, Integration and Tax Harmonization

Richard Baldwin and Paul Krugman

No 9290, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that agglomeration forces can reverse standard international-tax-competition results. Closer integration may result first in a race to the top' and then a race to the bottom, a result that is consistent with recent empirical work showing that the tax gap between rich and poor nations follows a bell-shaped path (Devereux, Griffith and Klemm 2002). Moreover, split-the-difference tax harmonization can make both nations worse off. This may help explain why tax harmonisation which is Pareto improving in the standard model is so difficult in the real world. The key theoretical insight is that agglomeration forces create quasi-rents that can be taxed without inducing delocation. 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. Since agglomeration rents are a bell-shaped function of the level of integration, the equilibrium tax gap in our tax game is also bell shaped.

JEL-codes: H00 H87 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-pol
Note: ITI PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Published as Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
Published as Richard Baldwin & Paul Krugman, 2001. "Agglomeration, integration and tax harmonization," European Business Review, vol 13(3).

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Journal Article: Agglomeration, integration and tax harmonisation (2004)
Working Paper: Agglomeration, Integration and Tax Harmonization (2001)
Working Paper: Agglomeration, Integration and Tax Harmonization (2000)
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