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Taxing and Subsidizing Foreign Investors

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    Many countries impose taxes on foreign investors while also having in place targeted subsidies and tax incentives that are designed to attract them. This paper shows that such a policy can be optimal from the standpoint of a host country. The government has an incentive to tax inframarginal firms because they are relatively immobile. It also has an incentive to subsidize marginal firms because the economic activity generated by such a subsidy can increase domestic wages in excess of the fiscal cost of the subsidy. These tax and subsidy policies improve host country welfare at the expense of foreigners. This analysis is thus able to provide an explanation for why tax coordination efforts can simultaneously entail reduced taxes and subsidies on foreign firms.

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    File URL: http://commons.colgate.edu/cgi/viewcontent.cgi?article=1049&context=econ_facschol
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    Paper provided by Department of Economics, Colgate University in its series Working Papers with number 2016-03.

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    Date of creation: 01 Jan 2016
    Date of revision: 25 May 2017
    Handle: RePEc:cgt:wpaper:2016-03
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    Web page: http://www.colgate.edu/academics/departments-and-programs/economics

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    1. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(3), pages 259-280, May.
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    3. Bauer, Christian & Davies, Ronald B. & Haufler, Andreas, 2014. "Economic integration and the optimal corporate tax structure with heterogeneous firms," Journal of Public Economics, Elsevier, vol. 110(C), pages 42-56.
    4. Chor, Davin, 2009. "Subsidies for FDI: Implications from a model with heterogeneous firms," Journal of International Economics, Elsevier, vol. 78(1), pages 113-125, June.
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    6. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1036-1047, October.
    7. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
    8. Demidova, Svetlana & Rodríguez-Clare, Andrés, 2013. "The simple analytics of the Melitz model in a small economy," Journal of International Economics, Elsevier, vol. 90(2), pages 266-272.
    9. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(4), pages 757-762, December.
    10. Alan H. Peters & Peter S. Fisher, 2002. "State Enterprise Zone Programs: Have They Worked?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number sezp.
    11. Timothy J. Bartik & George A. Erickcek, 2012. "Simulating the Effects of Michigan's MEGA Tax Credit Program on Job Creation and Fiscal Benefits," Upjohn Working Papers and Journal Articles 12-185, W.E. Upjohn Institute for Employment Research.
    12. Timothy J. Bartik, 2001. "Jobs for the Poor: Can Labor Demand Policies Help?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number tjb2001.
    13. Itoh, Motoshige & Kiyono, Kazuharu, 1987. "Welfare-Enhancing Export Subsidies," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 115-137, February.
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