Working Paper: CEPR ID: DP1822
Authors: Rodney D. Ludema; Ian Wooton
Abstract: 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.
Keywords: economic integration; economic geography; factor mobility; international trade; tax competition
JEL Codes: F12; F15; F22; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic integration (F15) | decrease in tax competition intensity (H29) |
| economic integration (F15) | increase in taxes (H29) |
| strength of agglomeration (R12) | increase in taxes (H29) |
| economic integration (F15) | labor becomes less responsive to tax differentials (J79) |