Industrial agglomeration and capital taxation
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- Discussion papers (SAM) 
Models with imperfect competition and intra-industry trade have become widely accepted as appropriate frameworks within which to analyze the impact of trade liberalization on industrial agglomeration. This paper makes one modi…cation to the standard model; it allows for taxation of internationally mobile capital. Making this change fundamentally alters the main lesson from the tax literature that a country which faces perfectly internationally mobile capital should not use source-based taxes on capital income. In particular, it is shown that a country which hosts an agglomeration may actually increase its welfare level per capita by levying a source-tax on capital income even if capital can move costlessly between countries. It is thereby able to exploit the locational inertia created by agglomeration forces.
UtgiverNorwegian School of Economics and Business Administration. Department of Economics