Symmetric tax competition and welfare with footloose capital

Dao Zhi Zeng, Shin Kun Peng

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the tax competition for mobile capital between two symmetric countries in a monopolistic competition economy. Taxation generates its own distortions of location and consumption as long as consumers/governments deviate from the symmetric equilibrium. Taking all possible distortions into account, this paper finds that the equilibrium tax rate may be positive and increasing when trade costs are high while it is negative and decreasing when trade costs are low if consumers have additively separable preferences displaying an increasing relative love for variety. This nonmonotonic relationship of tax rate with trade costs is further accompanied by welfare loss when market integration starts. The procompetitive effect and the income effect are both crucial to deriving the results.

Original languageEnglish
Pages (from-to)472-491
Number of pages20
JournalJournal of Regional Science
Volume61
Issue number2
DOIs
Publication statusPublished - 2021 Mar

Keywords

  • monopolistic competition
  • symmetric countries
  • tax competition
  • welfare loss

ASJC Scopus subject areas

  • Development
  • Environmental Science (miscellaneous)

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