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Analyzing a proposal to ban state tax breaks to businesses

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  • Thomas J. Holmes

Abstract

This article asks whether or not the overall welfare of U.S. residents would be greater if U.S. federal law prohibited state governments from offering tax breaks to particular businesses. The answer of a formal model is yes, making such tax breaks illegal could increase a summary measure of total welfare in the economy. According to the model, the policy could increase welfare because it would increase the tax revenue collected from capital agents, and that revenue could finance an increase in spending on public goods. The policy would also spread the tax burden more evenly in the economy and so reduce the deadweight loss of taxation per dollar collected. In addition, the policy would lead to a more efficient pattern of industry locations in the economy.

Suggested Citation

  • Thomas J. Holmes, 1995. "Analyzing a proposal to ban state tax breaks to businesses," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 29-39.
  • Handle: RePEc:fip:fedmqr:y:1995:i:spr:p:29-39:n:v.19no.2
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    References listed on IDEAS

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    1. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    2. Holmes, Thomas J, 1989. "The Effects of Third-Degree Price Discrimination in Oligopoly," American Economic Review, American Economic Association, vol. 79(1), pages 244-250, March.
    3. Wildasin, David E., 1991. "Some rudimetary 'duopolity' theory," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 393-421, November.
    4. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
    5. Patrick J. Kehoe, 1989. "Policy Cooperation Among Benevolent Governments May Be Undesirable," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 289-296.
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    Cited by:

    1. Tan, Justin & Li, Shaomin & Xia, Jun, 2007. "When iron fist, visible hand, and invisible hand meet: Firm-level effects of varying institutional environments in China," Journal of Business Research, Elsevier, vol. 60(7), pages 786-794, July.

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    Keywords

    State finance ; Taxation;

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