DP7340 Tax reform, delocation and heterogeneous firms

Author(s):	Richard Baldwin, Toshihiro Okubo
Publication Date:	June 2009
Keyword(s):	agglomeration forces, International tax competition, Zimmerman hypothesis
JEL(s):	H32, P16
Programme Areas:	International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7340

The standard international tax model is extended to allow for heterogeneous firms when agglomeration forces are important thus allowing us to study the relocation effects of taxes that vary according to firm size. We show that allowing for heterogeneity permits a given tax scheme to have an endogenously different effect on the location decision of small and big firms, with the biggest firms being endogenously more likely to relocate in reaction to high taxes. We show that a reform which flattens the tax-firm-size profile can raise tax revenue without inducing any relocation.