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The role of mobility in tax and subsidy competition

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  • Alexander Haupt

    () (University of Plymouth)

  • Tim Krieger

    () (University of Paderborn)

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 overcompensates 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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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2009/37.

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Length: 33 pages
Date of creation: 2009
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Handle: RePEc:ieb:wpaper:2010/1/doc2009-37

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

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References

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  1. 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.

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