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Symmetric tax competition and welfare with footloose capital
Author(s) -
Zeng DaoZhi,
Peng ShinKun
Publication year - 2021
Publication title -
journal of regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.171
H-Index - 79
eISSN - 1467-9787
pISSN - 0022-4146
DOI - 10.1111/jors.12517
Subject(s) - monopolistic competition , economics , tax competition , welfare , capital (architecture) , monetary economics , consumption (sociology) , competition (biology) , microeconomics , symmetric equilibrium , international economics , ad valorem tax , double taxation , market economy , public economics , monopoly , ecology , social science , game theory , archaeology , repeated game , sociology , biology , history , equilibrium selection
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.