Source versus residence: a comparison from a new economic geography perspective

Recently, issues of international taxation have also been analysed from a New Economic Geography perspective. These discussions show that agglomerative forces play a non negligible role. In the paper, we introduce explicitly taxation into a Footloose Capital Model and compare implications of taxation according to the residence principle and the source principle from a New Economic Geography perspective. We confirm that agglomerative effects change the results substantially compared to the standard analysis and that the two taxation principles have different implications for industry agglomeration.