Arbeitspapier

Tax competition for foreign direct investment

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We analyze tax competition between two countries of unequal size trying to attract a foreign-owned monopolist. When regional governments have only a lump-sum profit tax (subsidy) at their disposal, but face exogenous and identical transport costs for imports, then both countries will always offer to subsidize the firm. Furthermore, the maximum subsidy is greater in the larger region. However, if countries are given an additional instrument of either a tariff or a consumption tax, then the larger country will no longer underbid its smaller rival and its best offer may involve a positive profit tax. In both cases the equilibrium outcome is that the firm locates in the larger market, paying a profit tax that is increasing in the relative size of this market and which is made greater when the tariff (consumption tax) instrument is permitted.

Language
Englisch

Bibliographic citation
Series: Diskussionsbeiträge - Serie II ; No. 329

Classification
Wirtschaft
Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Trade Policy; International Trade Organizations
Economic Integration
Multinational Firms; International Business
Business Taxes and Subsidies including sales and value-added (VAT)
State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
Subject
tax competition
economic integration
foreign direct investment
regional location
Steuerwettbewerb
Subvention
Auslandsinvestition
Multinationales Unternehmen
Transportkosten
Standortwettbewerb
Theorie

Event
Geistige Schöpfung
(who)
Haufler, Andreas
Wooton, Ian
Event
Veröffentlichung
(who)
Universität Konstanz, Sonderforschungsbereich 178 - Internationalisierung der Wirtschaft
(where)
Konstanz
(when)
1997

Handle
Last update
10.03.2025, 11:43 AM CET

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Object type

  • Arbeitspapier

Associated

  • Haufler, Andreas
  • Wooton, Ian
  • Universität Konstanz, Sonderforschungsbereich 178 - Internationalisierung der Wirtschaft

Time of origin

  • 1997

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