Tax competition and economic geography

Abstract

Tax competition between two countries is considered in a trade-andlocation setting with differentiated products and monopolistic competition. There are two groups of workers_sile 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 destabilized by increased taxes on these mobile workers-even for perfectly coordinated tax increases. It is also shown that while tax competition gives rise to standard distortions in a tax-competition game when mobile workers are dispersed idmocent distortions result when they are concentrated in one country. © 2003 Blackwell Publishingdier Inc.