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State Tax Competition for Foreign Direct Investment: A Winnable War?

  • Ronald B. Davies

    ()

    (University of Oregon Economics Department)

When a multinational firm invests in a country, potential host states compete for the firm by offering firm-specific tax reductions. Critics blast such incentives as a prisoner’s dilemma that transfers rents to the firm without affecting the investment decision. In fact, these incentives are tied to the firm’s use of domestic inputs indicating that incentives affect output decisions. If there exist positive interstate spillovers, a federal subsidy is necessary to reach the national optimum without tax competition. Competition reduces state taxes and thus the need for federal subsidies. Also, under competition, the firm locates in the nation’s preferred location. Therefore, tax competition offers two means of increasing national welfare, indicating that it is not a simple prisoner’s dilemma.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2000-4.

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Length: 29
Date of creation: 01 May 2000
Date of revision: 01 Jul 2002
Handle: RePEc:ore:uoecwp:2000-4
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  2. Figlio, David N. & Blonigen, Bruce A., 2000. "The Effects of Foreign Direct Investment on Local Communities," Journal of Urban Economics, Elsevier, vol. 48(2), pages 338-363, September.
  3. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  15. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
  16. Keith Head & John Ries & Deborah Swenson, 1994. "Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States," NBER Working Papers 4767, National Bureau of Economic Research, Inc.
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