Agglomeration, Integration and Tax Harmonization

By Richard E. Baldwin, Paul Krugman. 2001

790 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/64830e2a94964b825049032180f3276067ae968d

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Citations in the corpus

Locational Competition and Agglomeration: The Role of Government Spending (2002, methodology): “In a much-discussed paper Baldwin and Krugman (2000), for instance, show that there is no need for a race to the bottom to begin with and, stronger still, a policy of tax harmonization could make all countries worse off.”
FDI and Taxation: A Meta-Study (2011, positive): “Similarly, Baldwin and Krugman (2004) show that agglomeration effects in geographic centers might allow governments to tax business more heavily.”
Agglomeration and Tax Competition (2006, positive): “All of the theoretical papers on agglomeration and tax competition to date use the core–periphery model or a variant thereof (see Ludema and Wooton, 2000; Kind et al., 2000; Andersson and Forslid, 2003; Baldwin and Krugman, 2004; Baldwin et al., 2003).”
Causes, benefits, and risks of business tax incentives (2010, background): “In their presence countries can maintain relatively high tax rates, although they would risk losing the agglomeration if they chose an excessively high rate (Baldwin and Krugman, 2004). 11 This is true for known deposits, at the point of decision to invest. It is not necessarily true for exploration”
Regional Inequality, Convergence, and its Determinants - A View from Outer Space (2017, positive): “In a similar manner, Baldwin and Krugman (2004) argue that a harmonized onesize-fits-all policy in taxation or regulations may harm the development of peripheral regions in the presence of agglomeration rents. However, potential benefits of decentralization may be offset by a ruinous tax competition”
Empirical evidence on the effects of tax incentives (2009, neutral): “GDP per capita, in combination with population, also proxy for agglomeration rents that could be taxed by the government (see Baldwin and Krugman, 2004), as well as for size, as larger countries are under less pressure form tax competition (inter alia Bucovetsky, 1991).”
Capital tax competition: bane or boon (2004, methodology): “The papers by Baldwin and Krugman (2000,Kind et al. (2000) and Ludema and Wooton (2000) all show that reduced transport costs can lead to higher taxes, over the range where these cost reductions increase agglomerative forces.”
Do Agglomeration Economies Reduce the Sensitivity of Firm Location to Tax Differentials (2012, background): “…of theoretical contributions, including Ludema and Wooton (2000), Kind, Midelfart-Knarvik and Schjelderup (2000), Andersson and Forslid (2003), Baldwin and Krugman (2004), and Borck and Pflüger (2006).2 The key insight of this literature is that agglomeration forces make the world ‘lumpy’:…”
The Global Diffusion of Public Policies: Social Construction, Coercion, Competition or Learning? (2007, background): “Baldwin & Krugman (2004) argue against the proposition that competition leads to tax convergence by pointing to the rents governments are able to collect under conditions of industrial agglomeration within their jurisdictions.”
Fiscal Decentralization and Regional Disparity: Evidence from Cross-Section and Panel Data (2009, positive): “Harmonization and centralization would have prevented this convergence process [Baldwin and Krugman (2004)].”
Do Governments Tax Agglomeration Rents? (2013, background): “…of capital and allow agglomeration-hosting governments to set a high corporate tax rate without triggering an immediate capital outﬂow even if capital is in principle highly mobile (see Ludema and Wooton (2000), Andersson and Forslid (2003), Baldwin and Krugman (2004) and Borck and Pﬂ¨uger (2006)).”
Company Tax Reform in the European Union (2004, positive): “Another economic argument against corporate tax harmonization is provided by the theoretical analysis of Baldwin and Krugman (2002) who set up a model of tax competition with agglomeration forces.”
Frontiers of the New Economic Geography (2005, methodology): “For 17 example, the introduction of Tiebout-type inter-jurisdictional competition (in taxation and the provision of local public goods) into core-periphery models has been achieved recently by several authors such as Baldwin and Krugman [12], Kind, Midelfart-Knarvik and Schjelderup [89], and Anderso”