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The role of mobility in tax and subsidy competition

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Author Info
Alexander Haupt () (University of Plymouth and CESifo)
Tim Krieger () (University of Paderborn)

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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 University of Paderborn, CIE Center for International Economics in its series Working Papers with number 21.

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Length: 30 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:pdn:wpaper:21

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Web page: http://www.uni-paderborn.de/fakultaeten/wiwi/department4/cie/
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Related research
Keywords: Tax competition; subsidy competition; capital and firm mobility; foreign direct investment;

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Find related papers by JEL classification:
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
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

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References listed on IDEAS
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    Other versions:
  2. Bucovetsky, Sam & Haufler, Andreas, 2008. "Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed," Journal of International Economics, Elsevier, vol. 74(1), pages 188-201, January. [Downloadable!] (restricted)
    Other versions:
  3. Bond, Eric W & Samuelson, Larry, 1986. "Tax Holidays as Signals," American Economic Review, American Economic Association, vol. 76(4), pages 820-26, September. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  10. Eckhard Janeba & Michael Smart, 2003. "Is Targeted Tax Competition Less Harmful than its Remedies?," Asia-Pacific Financial Markets, Springer, vol. 10(3), pages 259-280, May. [Downloadable!] (restricted)
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  11. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 81-108, January. [Downloadable!] (restricted)
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  12. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Marjit, Sugata, et al, 1999. "Resolving the Credibility Problem of an Honest Government: A Case for Foreign Investment Subsidy," Review of International Economics, Blackwell Publishing, vol. 7(4), pages 625-31, November.
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  15. Tim Krieger & Thomas Lange, 2008. "Education policy and tax competition with imperfect student and labor mobility," Working Papers 8, University of Paderborn, CIE Center for International Economics. [Downloadable!]
  16. 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. [Downloadable!] (restricted)
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