Tax Competition and the Nature of Capital

Richard Baldwin and Rikard Forslid

No 3607, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The standard race-to-the-bottom result is curious in one respect. If a nation wants to attract foreign capital, providing the optimal level of public amenities (and thus charging the optimal tax rate) would seem optimal. This conjecture fails in the standard tax competition model since foreign capital ignores host nation amenities. While this assumption is reasonable for physical capital, other forms of capital (human capital) tend to move with their owner, so amenities matter. We show that when factors move with their owners, symmetric international tax competition may leads to the socially optimal rate. This result can be thought of as a corollary of the Tiebout efficiency hypothesis.

Keywords: Tax competition; Tiebout hypothesis (search for similar items in EconPapers)
JEL-codes: F20 H20 H40 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (2)

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