Working Paper: CEPR ID: DP3607
Authors: Richard Baldwin; Rikard Forslid
Abstract: The standard race-to-the-bottom result is curious in one respect. If a nation wants to attract foreign capital, providing the optimal level of public amenities (and thus charging the optimal tax rate) would seem optimal. This conjecture fails in the standard tax competition model since foreign capital ignores host nation amenities. While this assumption is reasonable for physical capital, other forms of capital (human capital) tend to move with their owner, so amenities matter. We show that when factors move with their owners, symmetric international tax competition may leads to the socially optimal rate. This result can be thought of as a corollary of the Tiebout efficiency hypothesis.
Keywords: Tax Competition; Tiebout Hypothesis
JEL Codes: F20; H20; H40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mobility of disembodied capital (F20) | race to the bottom (L49) |
| mobile capital (L96) | underprovision of public goods (H42) |
| human capital mobility (J62) | socially optimal tax rate (H21) |
| preferences of capital owners (D33) | tax decisions (H20) |
| tax decisions (H20) | outcomes that maximize social welfare (D69) |