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rtant for location decisions, its infrastructure is vital too. Assuming that infrastructure costs per unit of capital are BE. This means that the total infrastructure costs given K1 amount of capital is BDGE. In this case is in the interest of the country to impose a tax even if it would actually tax the immobile factor. Why?

Let’s presume that the immobile capital is paying the tax, its income is equal to AGE minus BDGE or ACB minus CDG. On the other hand if we let the mobile factor to pay the tax which t which is equal to BE the quantity of capital falls to K2. Examining this option two things occur:

1. The infrastructure will be financed by the tax on capital, and

2. The income of the immobile factor, which is no longer being taxed, will be ACB, which is larger by the size of the triangle CDG than if this factor were to pay the tax.

Sinn elaborates on the above mentioned model by implementing congestion externalities. Considering that, the total cost of using the public good is:

c(K,W)?K

Where the size of the cost depends on the number of usage act (K) and the capacity of the infrastructure provided by the government (W). Capital is assumed to be completely mobile as opposed to labour which is considered to be completely immobile. Under these conditions the firms invest capital up to the point where the marginal productivity of capital is equal to the sum of the marginal interest, usage and tax cost:

fK(K,L) = r + c(K,W) + t

CK?K is marginal congestion externality, and t, W are considered to be the choice variables of the government. The government budget must be balanced according the following equation:

ωL = ρW - tK

The above equation means that the tax from the labor must be equal to the cost of using the infrastructure times the magnitude of infrastructure minus the tax on capital.

So the government’s attempt to maximize the rents R of his domestic residents is denoted by the following equation:

R = (f – fk?K) + r – ωL

If we combine the three above equations we have the following expression:

R = f (K, L) ? r(K ? ) ? c(K,W)K – ρW

From that equilibrium we conclude that firms adjust competitively to the given world market rate of interest. Knowing this, the government tries to adjust the tax rate t and the capacity of the public good W in a way that maximizes the rent of domestic citizens.

Another matter that must be examined is who actually pays for the infrastructure. Will a capital contribution is sufficient to levy the cost of providing the public infrastructure, or government deficit will arise, making the fixed factor to cover the hole? Sinn’s answer on this matter is that “The optimal congestion charge is sufficient to finance the public infrastructure when λ ≥ 0, that is, when the usage cost function does not have a negative degree of homogeneity. If λ < 0 there will be a fiscal deficit that must be covered by taxing the immobile factor.”

As long as European nation states are considered competition in a fiscal level among members has ruinous aspects when (central) governments step in to avoid ruinous competition in the private sector. So, in order to keep away from a race to the bottom, compensating strategy actions could be required, both at a national and at an internatio