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Does tax competition make mobile firms more footloose?

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  • Ben Ferrett
  • Andreas Hoefele
  • Ian Wooton

Abstract

We examine a two-period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez-faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez-faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump-sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.

Suggested Citation

  • Ben Ferrett & Andreas Hoefele & Ian Wooton, 2019. "Does tax competition make mobile firms more footloose?," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 379-402, February.
    • Handle: RePEc:cje:issued:v:52:y:2019:i:1:p:379-402
    DOI: 10.1111/caje.12375
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    Cited by:

    1. Luca Spataro & Tommaso Crescioli, 2024. "How much capital should be taxed? A review of the quantitative and empirical literature," Journal of Economic Surveys, Wiley Blackwell, vol. 38(4), pages 1399-1436, September.
    2. Haupt, Alexander & Krieger, Tim, 2020. "The role of relocation mobility in tax and subsidy competition," Journal of Urban Economics, Elsevier, vol. 116(C).
    3. Mao, Haiou & Görg, Holger & Fang, Guopei, 2023. "Time to Say Goodbye? The Impact of Environmental Regulation on Foreign Divestment," IZA Discussion Papers 16406, IZA Network @ LISER.
    4. Mao, Haiou & Görg, Holger & Fang, Guopei, 2023. "Time to say goodbye? The impact of environmental regulation on foreign divestment," KCG Working Papers 27, Kiel Centre for Globalization (KCG).
    5. Mao, Haiou & Görg, Holger & Fang, Guopei, 2023. "Time to say goodbye? The impact of environmental regulation on foreign divestment," Kiel Working Papers 2255, Kiel Institute for the World Economy.
    6. Nora Paulus & Patrice Pieretti & Benteng Zou, 2018. "Tax Competition - An intertemporal perspective," DEM Discussion Paper Series 18-10, Department of Economics at the University of Luxembourg.
    7. Haiou Mao & Holger Görg & Guopei Fang, 2024. "Time to say goodbye? The impact of environmental regulation on foreign divestment," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(2), pages 502-527, May.

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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