Working Paper: CEPR ID: DP2630
Authors: Richard Baldwin; Paul Krugman
Abstract: This Paper considers tax competition and tax harmonization in the presence of agglomeration forces and falling trade costs. With agglomerative forces operating, industry is not indifferent to location in equilibrium, so perfectly mobile capital becomes a quasi-fixed factor. This suggests that the tax game is something subtler than a race to the bottom. Advanced 'core' nations may act like limit-pricing monopolists toward less advanced 'periphery' countries. Consequently, integration need not lead to falling tax rates, and might well be consistent with the maintenance of large welfare states. ?Limit taxing? also means that simple tax harmonization ? adoption of a common tax rate ? always harms at least one nation and adoption of a rate between the two unharmonized rates harms both nations. A tax floor set at the lowest equilibrium tax rate leads to a weak Pareto improvement.
Keywords: economic geography; tax competition; tax harmonization; trade
JEL Codes: F12; F20; H00; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agglomeration economies (R11) | advanced core nations behave like limit-pricing monopolists towards less advanced peripheral countries (D43) |
| advanced core nations behave like limit-pricing monopolists towards less advanced peripheral countries (D43) | increased integration does not inherently lead to a decline in tax rates (H29) |
| agglomeration economies (R11) | core countries maintain higher tax rates (H29) |
| core countries maintain higher tax rates (H29) | sustain large welfare states (P16) |
| tax harmonization (H26) | harm at least one nation (F52) |
| agglomeration forces (R32) | asymmetric advantages held by core nations (F12) |
| tax floor (H29) | weak Pareto improvement for high-tax nations without negatively impacting low-tax nations (H21) |