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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2002:18:
Tax Competition and the Nature of Capital

Richard E. Baldwin () and 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) tends to move with its 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; (follow links to similar papers)

JEL-Codes: F12; F20; H21; (follow links to similar papers)

9 pages, July 2002

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