Intra-regional Tax Competition and Economic Geography

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Abstract

In this paper, we extend a solvable version of the core–periphery agglomeration model to four countries located in two regions to show that governments in the agglomerated region may not be able to levy a tax premium on mobile capital if there is intra-regional tax competition. This hypothesis challenges standard results in the literature and delegates clarification to empirical research. With respect to welfare, we find that intra-regional tax competition is detrimental from a welfare perspective and that tax harmonisation unambiguously makes both countries in the core region better off.

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