DP2188 Competing for Capital in a 'Lumpy' World

Author(s):	Hans Jarle Kind, Guttorm Schjelderup, Karen-Helene Ulltveit-Moe
Publication Date:	July 1999
Keyword(s):	Economic Geography, Economic Integration, Industrial Agglomeration, Tax Competition
JEL(s):	F12, F15, H2
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2188

This paper uses a new economic geography model to analyze tax competition between two countries trying to attract internationally mobile capital. Each government may levy a source tax on capital and a lump sum tax on fixed labor. If industry is concentrated in one of the countries, the analysis finds that the host country will gain from setting its source tax on capital above that of the other country. In particular, the host may increase its welfare per capita by setting a positive source tax on capital and capture the positive externality that arise in the agglomeration. If industry is not concentrated, however, both countries will subsidize capital.