Research Papers in Economics, Department of Economics, Stockholm University
Corporate Tax Systems and the Location of Industry
Abstract: This paper analyzes the effects of different corporate tax
systems on the location of industry within an economic geography model with
regional size asymmetries. Both the North and the South gain industry by
adopting a tax regime that produces the lowest tax level. As the share of
expenditures in the North increases, the Nash equilibrium has this region
setting regressive taxes, while the South introduces progressive taxation.
The unilateral welfare-maximizing tax structure in the North (South) is the
regressive (progressive) system when expenditures in the North increase.
Welfare in the North (South) is however maximized if both regions set
regressive (progressive) taxes, while regressive (progressive) taxation in
both regions represents a joint welfare maximizing outcome if the economic
size of the North is higher (lower) than a certain threshold value. As
trade is liberalized, the equilibrium tax regime adopted depends on how pro
ts respond to lower trade costs. Proportional taxation is never an
equilibrium, neither as regional spending changes, nor as trade is
Keywords: Economic Geography; Tax Systems; Corporate Taxation; (follow links to similar papers)
JEL-Codes: F12; H25; R12; (follow links to similar papers)
30 pages, April 14, 2010
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