Insensitive Multinationals? Competitive Subsidies and Carbon and Corporate Income Taxes

One of the crucial aspects of international mobility of firms that we wish to consider is the fiscal stimulus that a nation may offer to multinationals but not to domestic firms. The subsidy is the policy instrument that allows each nation to control the size of its industry. Our simple international economy enables us to identify the effects that international mobility cause to the allocation of resources. We examine two scenarios, one in which multinationals are insensitive and another in which multinationals are sensitive. Multinationals are insensitive if their mobility decisions do not depend on subsidies and taxes. In the Nash equilibrium with insensitive multinationals, each nation overprovides its national public good. With symmetric tax bases, both nations provide equal amounts of public goods and set their relative carbon taxes efficiently. We find that if nations need to make efforts to attract multinationals, they will be more sensitive to the tax burden that its taxes cause to multinationals. The optimal national subsidy policies nullify the excessive burden that multinationals face relative to domestic firms. As the optimal national policies for provision of public goods and control of carbon emissions demonstrate, the nations essentially treat multinationals as domestic firms in the setting with sensitive multinationals. The relative carbon tax rate in the resource-poor nation exceeds the efficient rate, and the latter exceeds the relative carbon tax rate the resource-rich nation charges.