DP1822 Economic Geography and the Fiscal Effects of Regional Integration
|Author(s):||Rodney D Ludema, Ian Wooton|
|Publication Date:||March 1998|
|Keyword(s):||Economic Geography, Economic Integration, Factor Mobility, International Trade, Tax Competition|
|JEL(s):||F12, F15, F22, H73|
|Programme Areas:||International Trade and Regional Economics, Human Resources|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1822|
In models of economic geography, plant-level scale economies and trade costs create incentives for spatial agglomeration of production into a manufacturing core and agricultural periphery, creating regional income differentials. We examine tax competition between national governments to influence the location of manufacturing activity. Labour is imperfectly mobile and governments impose redistributive taxes. Regional integration is modelled as either increased labour mobility or lower trade costs. We show that either type of integration may result in a decrease in the intensity of tax competition, and thus higher equilibrium taxes. Moreover, economic integration must increase taxes when the forces of agglomeration are the strongest.