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Abstract

When a multinational firm invests in a country, potential host states compete for the firm by offering firm-specific tax reductions. Critics blast such incentives as a prisoner’s dilemma that transfers rents to the firm without affecting the investment decision. In fact, these incentives are tied to the firm’s use of domestic inputs indicating that incentives affect output decisions. If there exist positive interstate spillovers, a federal subsidy is necessary to reach the national optimum without tax competition. Competition reduces state taxes and thus the need for federal subsidies. Also, under competition, the firm locates in the nation’s preferred location. Therefore, tax competition offers two means of increasing national welfare, indicating that it is not a simple prisoner’s dilemma.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 67 (2005)
Issue (Month): 2 (December)
Pages: 498-512

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Handle: RePEc:eee:inecon:v:67:y:2005:i:2:p:498-512

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Web page: http://www.elsevier.com/locate/inca/505552

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Find related papers by JEL classification:

• F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
• H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
• R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - Government Policy; Regulatory Policy

References

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