Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

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

Richard E. Baldwin () and Rikard Forslid ()
Additional contact information
Richard E. Baldwin: Graduate Institute of International Studies, Geneva, Postal: Graduate Institute of International Studies, Geneva, Rue de Lausanne 132 , CH-1211 Genève 21, Switzerland,
Rikard Forslid: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

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

JEL-codes: F12; F20; H21

9 pages, July 2002

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