Agglomeration, Integration and Tax Harmonization / Richard E. Baldwin, Paul Krugman.

Format:

Book

Author/Creator:

Baldwin, Richard E.

Contributor:

National Bureau of Economic Research.

Krugman, Paul.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9290.

NBER working paper series no. w9290

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

We show that agglomeration forces can reverse standard international-tax-competition results. Closer integration may result first in a race to the top' and then a race to the bottom, a result that is consistent with recent empirical work showing that the tax gap between rich and poor nations follows a bell-shaped path (Devereux, Griffith and Klemm 2002). Moreover, split-the-difference tax harmonization can make both nations worse off. This may help explain why tax harmonisation which is Pareto improving in the standard model is so difficult in the real world. The key theoretical insight is that agglomeration forces create quasi-rents that can be taxed without inducing delocation. 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. Since agglomeration rents are a bell-shaped function of the level of integration, the equilibrium tax gap in our tax game is also bell shaped.

Notes:

Print version record

October 2002.