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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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-02/cesifo1_wp2555.pdf
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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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  15. Haufler, Andreas & Wooton, Ian, 2006. "The effects of regional tax and subsidy coordination on foreign direct investment," Munich Reprints in Economics 19926, University of Munich, Department of Economics.
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  24. Wilson, John Douglas, 2005. "Welfare-improving competition for mobile capital," Journal of Urban Economics, Elsevier, vol. 57(1), pages 1-18, January.
  25. Beate Grundig & Christian Leßmann & Anna Sophie Müller & Joachim Ragnitz & Michael Reinhard & Beate Schirwitz & Heinz Schmalholz & Marcel Thum, 2008. "Rechtfertigung von Ansiedlungssubventionen am Beispiel der Halbleiterindustrie : Gutachten im Auftrag der Sächsischen Staatskanzlei," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 45, October.
  26. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
  27. Haupt, Alexander & Peters, Wolfgang, 2005. "Restricting preferential tax regimes to avoid harmful tax competition," Regional Science and Urban Economics, Elsevier, vol. 35(5), pages 493-507, September.
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