Working Paper: CEPR ID: DP2220
Authors: Fredrik Andersson; Rikard Forslid
Abstract: 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.
Keywords: Agglomeration; Economic Geography; Tax Competition
JEL Codes: F12; F15; F21; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased taxes on mobile workers (H29) | Destabilization of the equilibrium of mobile labor distribution across countries (F66) |
| Agglomeration of labor (J49) | Tax implications differ when mobile labor concentrates in one country (F20) |
| Higher taxes on mobile labor (J61) | Instability of dispersed equilibrium (D50) |
| Taxation of mobile factors (F20) | Viability of a dispersed distribution of those factors (D39) |
| Ratio of taxes on mobile versus immobile labor (J69) | Stability of a dispersed equilibrium (C62) |