Agglomeration, Integration and Tax Harmonization

25 Pages Posted: 19 Oct 2002

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Paul R. Krugman

Princeton University - Woodrow Wilson School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2002

Abstract

We show that agglomeration forces can reverse standard international-tax-competition results. Closer integration may result first in a race to the top' and then a race to the bottom, a result that is consistent with recent empirical work showing that the tax gap between rich and poor nations follows a bell-shaped path (Devereux, Griffith and Klemm 2002). Moreover, split-the-difference tax harmonization can make both nations worse off. This may help explain why tax harmonisation which is Pareto improving in the standard model is so difficult in the real world. The key theoretical insight is that agglomeration forces create quasi-rents that can be taxed without inducing delocation. This suggests that the tax game is something subtler than a race to the bottom. Advanced 'core' nations may act like limit-pricing monopolists toward less advanced 'periphery' countries. Since agglomeration rents are a bell-shaped function of the level of integration, the equilibrium tax gap in our tax game is also bell shaped.

Suggested Citation

Baldwin, Richard E. and Krugman, Paul R., Agglomeration, Integration and Tax Harmonization (October 2002). NBER Working Paper No. w9290. Available at SSRN: https://ssrn.com/abstract=341858

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul R. Krugman

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States
609-258-4570 (Phone)
609-258-2809 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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