DP6843 Tax Reform, Delocation and Heterogeneous Firms: Base Widening and Rate Lowering Reforms

Author(s): Richard Baldwin , Toshihiro Okubo

Publication Date: May 2008

Keyword(s): agglomeration , heterogeneous firms , tax reform

JEL(s): H32 , P16

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP6843.asp.asp

We model international tax competition allowing for agglomeration forces and heterogeneous firms. This provides a new perspective since a tax schedules have different effects on the international relocation decision of small and large firms (large firms are endogenously more sensitive to tax competition) and these decisions affect industry productivity in addition to the usual effects. The model allows us to study rate-lowering base-widening reforms. We show it is generally possible to design such a reforms that raises revenue without losing firms.