Working Paper: CEPR ID: DP7340
Authors: Richard Baldwin; Toshihiro Okubo
Abstract: 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.
Keywords: agglomeration forces; international tax competition; Zimmerman hypothesis
JEL Codes: H32; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax rates (H29) | firm relocation decisions (R30) |
| tax reforms that lower rates while widening the tax base (H21) | overall tax revenue (H20) |
| tax reforms (H29) | average industry productivity (L69) |
| firm heterogeneity (D21) | understanding of tax scheme impacts (H26) |
| larger firms (L25) | likelihood of relocation in response to high taxes (R23) |