DP2220 Tax Competition and Economic Geography

Author(s):	Fredrik Andersson, Rikard Forslid
Publication Date:	August 1999
Keyword(s):	Agglomeration, Economic Geography, Tax Competition
JEL(s):	F12, F15, F21, R12
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2220

Tax competition between two countries is considered in a trade-and-location setting with differentiated products and monopolistic competition. There are two groups of workers, mobile ones and immobile ones. Taxes are used for producing a public good. It is shown that an equilibrium with mobile workers dispersed across countries is destabilised by increased taxes on these - and this is shown to be true also for perfectly coordinated tax increases. It is also shown that an agglomeration is taxable, and that increasing public spending may relax the tax pressure on immobile workers consistent with preserving an agglomeration for some levels of taxes.