Standard tax competition and increasing returns

The "race to the bottom" result of the standard tax competition literature implies that capital taxes are competed downward as capital becomes more mobile. The new economic geography literature, in contrast, finds that increasing capital mobility can be associated with a rise in capital tax rates, or a "race to the top." This paper derives the race to the top result from within the standard tax competition modeling framework augmented with agglomeration forces. When agglomeration forces are sufficiently strong, tax competition pressures are mitigated and capital taxes are instead driven by tax exporting incentives.