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The role of relocation mobility in tax and subsidy competition

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  • Haupt, Alexander
  • Krieger, Tim

Abstract

In this paper, we analyse the role of relocation mobility in tax and subsidy competition. Our primary result is that increasing mobility of firms leads to increasing ‘net’ tax revenues under plausible assumptions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in government subsidy payments can overcompensate the decline in tax revenues, leading to a rise in net tax revenues. Interestingly, the opportunity costs of subsidy competition can rise along with net tax revenues. We derive these conclusions in a model in which two governments are first engaged in subsidy competition and thereafter in tax competition, and firms locate and potentially relocate in response to successive policy choices on taxes and subsidies.

Suggested Citation

  • Haupt, Alexander & Krieger, Tim, 2020. "The role of relocation mobility in tax and subsidy competition," Journal of Urban Economics, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:juecon:v:116:y:2020:i:c:s0094119019300737
    DOI: 10.1016/j.jue.2019.103196
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    References listed on IDEAS

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    Cited by:

    1. Langenmayr, Dominika & Simmler, Martin, 2021. "Firm mobility and jurisdictions’ tax rate choices: Evidence from immobile firm entry," Journal of Public Economics, Elsevier, vol. 204(C).

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    More about this item

    Keywords

    Tax competition; Subsidy competition; Capital and firm mobility; Foreign direct investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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