There is a gap between the predictions of capital tax
competition models and the reality they purport to describe. In a standard
capital-tax model, with head taxes, capital-importing regions tax capital and
capital-exporting regions subsidize capital. In the real-world, competing regions
appear to subsidize capital whether or not they are capital importers. We show
that by relaxing the standard assumption of constant returns to scale symmetric
regions in a Nash equilibrium may all subsidize capital.We also prove that any
ine¢ciencies in a non-symmetric Nash equilibria arise entirely from regions’
incentives to manipulate the terms of trade, and not from increasing returns.We
also compare our results to those in captial tax competition models without
head taxes.