FACTOR OWNERSHIP, TAXES, AND SPECIALIZATION

This paper examines the incentives of regions to levy source-based cap ital taxes, when the tax revenue is not needed to finance the regional public sector. It is assumed that capital is completely mobile among regions, but that labour is completely immobile. Since each region can produce the same two tradable goods, using the same technology, then differences in tax rates on capital will lead to some specialization. If residents of one region own more of the nation's capital (per perso n), then these tax differences may be an equilibrium phenomenon. Regio ns with below-average capital endowment per person will levy capital t axes to lower the cost of the capital they import, even though these t axes lead to capital flight, and specialization in the labour-intensiv e good.