Tax Reform, Delocation and Heterogeneous Firms

33 Pages Posted: 26 Aug 2009

See all articles by Richard Baldwin

Richard Baldwin

IMD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Toshihiro Okubo

University of Geneva - Graduate Institute of International Studies (HEI)

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Date Written: June 2009

Abstract

The standard international tax model is extended to allow for heterogeneous firms when agglomeration forces are important thus allowing us to study the relocation effects of taxes that vary according to firm size. We show that allowing for heterogeneity permits a given tax scheme to have an endogenously different effect on the location decision of small and big firms, with the biggest firms being endogenously more likely to relocate in reaction to high taxes. We show that a reform which flattens the tax-firm-size profile can raise tax revenue without inducing any relocation.

Keywords: agglomeration forces, International tax competition, Zimmerman hypothesis

JEL Classification: H32, P16

Suggested Citation

Baldwin, Richard and Okubo, Toshihiro, Tax Reform, Delocation and Heterogeneous Firms (June 2009). CEPR Discussion Paper No. DP7340, Available at SSRN: https://ssrn.com/abstract=1461969

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