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Tax competition with heterogeneous capital mobility

  • Steeve Mongrain

    ()

    (Simon Fraser University)

  • John D. Wilson

    ()

    (Michigan State University)

In this paper, we look at corporate fiscal policies set by two competing regions in an environment where firms are heterogonous regarding to their mobility costs. We show that if regions are allow to tax domestic and foreign capital at different rates, they will offer a preferential treatment to foreign firms, even if mobility costs are symmetrically distributed across regions. Preventing such type of preferential treatment raises revenues for both regions, unless there exist a high density of firms with low moving costs. Because preferential tax treatment promotes firms movement for fiscal raisons, such tax regime always generates more social loss due to unnecessary delocalization. We also investigate the effect of heterogeneity among regions.

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File URL: http://www.ieb.ub.edu/aplicacio/fitxers/2011/10/Doc2011-25.pdf
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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/25.

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Length: 32 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ieb:wpaper:2011/10/doc2011-25
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  1. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  2. 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.
  3. Kai A. Konrad & Dan Kovenock, 2008. "Competition for FDI with vintage investment and agglomeration advantages," Purdue University Economics Working Papers 1210, Purdue University, Department of Economics.
  4. Hong, Qing & Smart, Michael, 2010. "In praise of tax havens: International tax planning and foreign direct investment," European Economic Review, Elsevier, vol. 54(1), pages 82-95, January.
  5. Wildasin, David E. & Wilson, John Douglas, 1996. "Imperfect mobility and local government behaviour in an overlapping-generations model," Journal of Public Economics, Elsevier, vol. 60(2), pages 177-198, May.
  6. Hagen, K.P. & Osmundsen, P. & Schjelderup, G., 1995. "Internationally Mobile Firms and Tax Policy," Papers 8/95, Norwegian School of Economics and Business Administration-.
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