Tax haven, pollution haven or both?

This paper studies the interplay between a poor and a rich country when they sequentially compete over corporate taxes and environmental regulations to attract imperfectly mobile firms. Countries have also different environmental awareness. We show that the poor country generally undercuts the corporate tax set by the rich country. The poor country chooses to be both a tax and pollution haven when it is less environmentally concerned than the rich country and capital integration is low. The rich country has never an incentive to be both a tax haven a pollution haven. Interestingly, at equilibrium, the poor country rarely does better in terms of welfare than the rich country. Finally we find that higher capital mobility narrows the tax gap between the rich and the poor country but does not affect the optimal environmental policy: tax competition immunizes countries against the detrimental effect of globalization on environmental standards.