Taxes and location decisions of firms.

Abstract

In traditional tax literature it is argued that (further) integration among countrieswill inevitably lead to a race to the bottom of corporate tax rates. In order toattract firms, countries are assumed to lower their tax rates below the ones of their’competitors’. According to the New Economic Geography literature this howeverdoes not necessarily need to be the case. It is argued that more agglomerated regionsbenefit from what is called agglomeration rents and that these rents can be taxed.As integration moves on, one might expect the tax difference between more and lessagglomerated regions to increase instead of fading out. The purpose of this paper isto test this theory for Belgian firms.