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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. Est‐ce que la concurrence fiscale rend les firmes mobiles davantage nomades? Les auteurs examinent un modèle régional à deux périodes dans le cadre d’une géographie économique en évolution qui peut potentiellement créer des citations pour les firmes à se relocaliser entre les deux périodes. On argue que la concurrence fiscale va rendre les firmes plus nomades, mais que ceci accroît l’efficacité par rapport à ce qu’on peut attendre du laissez faire. On établit que (i) la concurrence fiscale conduit à des résultats d’investissement efficients; et que (ii) la mobilité des firmes est plus grande en régime de concurrence fiscale qu’en régime de laissez faire. Quand la relocalisation est coûteuse, il se peut qu’il y ait trop peu de mobilité dans le temps à proportion que les firmes ne prennent pas en compte l’impact de l’investissement direct à l’étranger sur le mieux‐être de chaque pays. Dans le cas d’impôts ou de transferts forfaitaires, les firmes capturent ces avantages et les internalisent, et la concurrence fiscale génère des résultats efficients. Quand on examine la situation dans le cadre temporel de plusieurs périodes, la concurrence fiscale induit une relocalisation plus tôt qu’en l’absence de concurrence fiscale.

Suggested Citation

  • Ben Ferrett & Andreas Hoefele & Ian Wooton, 2019. "Does tax competition make mobile firms more footloose?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 379-402, February.
    • Handle: RePEc:wly:canjec:v:52:y:2019:i:1:p:379-402
    DOI: 10.1111/caje.12375
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    References listed on IDEAS

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    1. Konrad, Kai A. & Kovenock, Dan, 2009. "Competition for FDI with vintage investment and agglomeration advantages," Journal of International Economics, Elsevier, vol. 79(2), pages 230-237, November.
    2. Ben Ferrett & Ian Wooton, 2010. "Competing for a duopoly: international trade and tax competition," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 776-794, August.
    3. Fumagalli, Chiara, 2003. "On the welfare effects of competition for foreign direct investments," European Economic Review, Elsevier, vol. 47(6), pages 963-983, December.
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    Cited by:

    1. Haupt, Alexander & Krieger, Tim, 2020. "The role of relocation mobility in tax and subsidy competition," Journal of Urban Economics, Elsevier, vol. 116(C).
    2. 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 (IfW Kiel).
    3. Mao, Haiou & Görg, Holger & Fang, Guopei, 2023. "Time to Say Goodbye? The Impact of Environmental Regulation on Foreign Divestment," IZA Discussion Papers 16406, Institute of Labor Economics (IZA).
    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. 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.

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    More about this item

    JEL classification:

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

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