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The Role of Mobility in Tax and Subsidy Competition

  • Alexander Haupt
  • Tim Krieger

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 over-compensates 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 CESifo Group Munich in its series CESifo Working Paper Series with number 2555.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2555
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