State tax competition for foreign direct investment: a winnable war?
AbstractWhen 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 prisonerâs dilemma that transfers rents to the firm without affecting the investment decision. In fact, these incentives are tied to the firmâs 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 nationâs preferred location. Therefore, tax competition offers two means of increasing national welfare, indicating that it is not a simple prisonerâs dilemma.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 67 (2005)
Issue (Month): 2 (December)
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Web page: http://www.elsevier.com/locate/inca/505552
Other versions of this item:
- Ronald B. Davies, 2000. "State Tax Competition for Foreign Direct Investment: A Winnable War?," University of Oregon Economics Department Working Papers 2000-4, University of Oregon Economics Department, revised 01 Jul 2002.
- 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, Spatial Production Analysis, and Firm Location - - - Government Policy
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