Factor Ownership, Taxes, and Specialization

Sam Bucovetsky

Canadian Journal of Economics, 1993, vol. 26, issue 2, 317-36

Abstract: This paper examines the incentives of regions to levy source-based.capital taxes, when the tax revenue is not needed to finance the regional public sector. It is assumed that capital is completely mobile among regions, but that labor is completely immobile. Since each region can produce the same two tradable goods, using the same technology, then differences in tax rates on capital will lead to some specialization. If residents of one region own more of the nation's capital (per person), then these tax differences may be an equilibrium phenomenon. Regions with below-average capital endowment per person will levy capital taxes to lower the cost of the capital they import, even though these taxes lead to capital flight, and specialization in the labor-intensive good.

Date: 1993
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