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Tax Competition, Location, and Horizontal Foreign Direct Investment

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  • K Behrens
  • P M Picard

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 Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 0517.

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Date of creation: 2005
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Handle: RePEc:man:sespap:0517

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Citations

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Cited by:
  1. David Wildasin, 2007. "Pre-Emption: Federal Statutory Intervention in State Taxation," Working Papers 2007-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  2. 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.
  3. TOULEMONDE, Eric, 2007. "Home market effect versus multinationals," CORE Discussion Papers 2007046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  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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