Industrial Agglomeration and Capital Taxation

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 modification 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 a perfectly elastic supply of capital should not use source-based taxes on capital income.