Fiscal Competition and Growth When Capital Is Imperfectly Mobile

Is tax competition good for economic growth? We address this question using a simple model of endogenous growth. Governments in a system of many small jurisdictions benevolently maximize the welfare of immobile residents. Quadratic (de-)installation costs limit the mobility of capital. We look at optimal taxation and long-run growth, and we analyse the effects of cost parameter variations on taxation and growth. A race to the bottom in capital tax rates is only one possibility; the relationship between capital mobility and capital tax rates is not monotonic. Growth and capital mobility are unambiguously positively related.