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Tax Competition and the Nature of Capital

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  • Baldwin, Richard
  • Forslid, Rikard

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.

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  • Baldwin, Richard & Forslid, Rikard, 2002. "Tax Competition and the Nature of Capital," CEPR Discussion Papers 3607, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3607
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    Cited by:

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    2. Riou, Stephane, 2006. "Transfer and tax competition in a system of hierarchical governments," Regional Science and Urban Economics, Elsevier, vol. 36(2), pages 249-269, March.

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    More about this item

    Keywords

    Tax competition; Tiebout hypothesis;

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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