TY  - JOUR
AU  - Baldwin,Richard E.
AU  - Krugman,Paul
TI  - Agglomeration, Integration and Tax Harmonization
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9290
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9290
L1  - http://www.nber.org/papers/w9290.pdf
N1  - Author contact info:
Richard Baldwin
Cigale 2
1010 Lausanne
SWITZERLAND
Tel: 41-22-908-5900
E-Mail: rbaldwin@cepr.org

Paul R. Krugman
Department of Economics
Princeton University
Woodrow Wilson School
Princeton, NJ  08544
Tel: 609/258-4570
Fax: 609/258-2809
E-Mail: pkrugman@princeton.edu
AB  - 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.
ER  -