Competing for capital in a 'lumpy' world

This paper uses a new economic geography model to analyze tax competition b etween two countries trying to attract internationally mobile capital. Each government may levy a source tax on capital and a lump sum tax on fixed la bor. If industry is concentrated in one of the countries, the analysis find s that the host country will gain from setting its source tax on capital ab ove that of the other country. In particular, the host may increase its wel fare per capita by setting a positive source tax on capital and capture the positive externality that arise in the agglomeration. If industry is not c oncentrated, however, both countries will subsidize capital. (C) 2000 Elsev ier Science S.A. All rights reserved.