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The Role of Mobility in Tax and Subsidy Competition

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  • Alexander Haupt
  • Tim Krieger

Abstract

In this paper, we analyse the role of mobility in tax and subsidy competition. Our primary result is that increasing ‘relocation’ mobility of firms leads to increasing ‘net’ tax revenues under fairly weak conditions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in the governments’ subsidy payments over-compensates the decline in tax revenues, leading to a rise in net tax revenues. We derive this conclusion 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 the two political choices.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-02/cesifo1_wp2555.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2555.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2555

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Keywords: tax competition; subsidy competition; capital and firm mobility; foreign direct investment;

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  1. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
  2. Richard Chisik & Ronald B. Davies, 2010. "Gradualism in Tax Treaties with Irreversible Foreign Direct Investment," Working Papers 019, Ryerson University, Department of Economics.
  3. Konrad, Kai A. & Kovenock, Dan, 2008. "Competition for FDI with vintage investment and agglomeration advantages," Discussion Papers, Research Unit: Market Processes and Governance SP II 2008-09, Social Science Research Center Berlin (WZB).
  4. Thomas, Jonathan & Worrall, Tim, 1990. "Foreign direct investment and the risk of expropriation," Kiel Working Papers 411, Kiel Institute for the World Economy.
  5. Beate Grundig & Christian Leßmann & Anna Sophie Müller & Joachim Ragnitz & Michael Reinhard & Beate Schirwitz & Heinz Schmalholz & Marcel Thum, 2008. "Rechtfertigung von Ansiedlungssubventionen am Beispiel der Halbleiterindustrie : Gutachten im Auftrag der Sächsischen Staatskanzlei," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 45, October.
  6. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  7. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, University of Paderborn, CIE Center for International Economics.
  8. Lee, Kangoh, 1997. "Tax Competition with Imperfectly Mobile Capital," Journal of Urban Economics, Elsevier, vol. 42(2), pages 222-242, September.
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  10. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
  11. Bucovetsky, Sam & Haufler, Andreas, 2008. "Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?," Munich Reprints in Economics 19975, University of Munich, Department of Economics.
  12. Rainald Borck & Michael Pflüger, 2004. "Agglomeration and Tax Competition," Discussion Papers of DIW Berlin 408, DIW Berlin, German Institute for Economic Research.
  13. Haufler, Andreas & Mittermaier, Ferdinand, 2011. "Unionisation Triggers Tax Incentives to Attract Foreign Direct Investment," Munich Reprints in Economics 20404, University of Munich, Department of Economics.
  14. Eckhard Janeba, 2002. "Attracting Fdi in a Politically Risky World," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1127-1155, November.
  15. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, René M. & Williamson, Rohan, 2002. "Corporate Governance and the Home Bias," SIFR Research Report Series 11, Institute for Financial Research.
  16. Marjit, Sugata, et al, 1999. "Resolving the Credibility Problem of an Honest Government: A Case for Foreign Investment Subsidy," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 625-31, November.
  17. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
  18. Haupt, Alexander & Peters, Wolfgang, 2005. "Restricting preferential tax regimes to avoid harmful tax competition," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 493-507, September.
  19. Tim Krieger & Thomas Lange, 2010. "Education policy and tax competition with imperfect student and labor mobility," International Tax and Public Finance, Springer, vol. 17(6), pages 587-606, December.
  20. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
  21. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
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  23. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer, vol. 10(3), pages 259-80, May.
  24. Wilson, John Douglas, 2005. "Welfare-improving competition for mobile capital," Journal of Urban Economics, Elsevier, vol. 57(1), pages 1-18, January.
  25. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
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  28. repec:pdn:wpaper:8 is not listed on IDEAS
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Cited by:
  1. Alexander Haupt & Tim Krieger, 2009. "The role of mobility in tax and subsidy competition," Working Papers CIE 21, University of Paderborn, CIE Center for International Economics.
  2. Tim Krieger & Thomas Lange, 2008. "Education policy and tax competition with imperfect student and labor mobility," Working Papers CIE 8, University of Paderborn, CIE Center for International Economics.

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