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Tax competition, location, and horizontal foreign direct investment

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  • BEHRENS, Kristian
  • PICARD, Pierre M.

Abstract

We develop a model of capital tax competition in which imperfectly competitive firms choose both the number of plants they operate and their location. When compared to models with single-plant firms, the presence of multinationals reverses some standard results. First, instead of being subsidized, capital may actually be taxed in equilibrium, which shows that the presence of taxable "multinational rents" relaxes tax competition. Second, even when firms are subsidized, their subsidy-inclusive profits may be decreasing in subsidies, due to fiercer price competition by more multinationals. Third,multinationals may give rise to multiple equilibria in the tax game, one of which can be a "subsidy trap" characterized by many multinationals, high subsidy levels, and low welfare.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005091.

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Date of creation: 00 Dec 2005
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Handle: RePEc:cor:louvco:2005091

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Keywords: capital tax competition; international trade; multi-plant location problem; foreign direct investment; imperfect competition;

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References

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Citations

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Cited by:
  1. Hikaru Ogawa & David Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," Working Papers 2007-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  2. Toulemonde, Eric, 2007. "Home Market Effect versus Multinationals," IZA Discussion Papers 2829, Institute for the Study of Labor (IZA).
  3. David Wildasin, 2007. "Pre-Emption: Federal Statutory Intervention in State Taxation," Working Papers 2007-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  4. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.

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