Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2000:5: Tax Competition and Economic Geography

Rikard Forslid () and Fredrik Andersson ()
Additional contact information
Rikard Forslid: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Fredrik Andersson: Lund University, Postal: Department of Economics, Lund University, PO Box 7082, S-220 07 LUND, Sweden

Abstract: Tax competition between two countries is considered in a trade- and-location setting with differentiated products and monopolistic competition. There are two groups of workers, mobile ones and immobile ones. Taxes are used for producing a public good. It is shown that an equilibrium with mobile workers dispersed across countries is destabilised by increased taxes on these mobile workers|and this is shown to be true also for perfectly coordinated tax increases. It is also shown that an agglomeration is taxable, and that increasing public spending may relax the minimum tax pressure on immobile workers consistent with preserv-ing an agglomeration.

Keywords: JEL Classi¯cation: F12; F15; F21; R12 agglomeration; economic geography; tax competition

JEL-codes: F12; F15; F21; R12

21 pages, May 20, 1999

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