Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10477411 | Journal of International Economics | 2005 | 15 Pages |
Abstract
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 for transferring rents to the firm without affecting the investment decision. In fact, these incentives are tied to the firm's use of domestic inputs and therefore affect output decisions. With positive interstate spillovers, a federal subsidy is necessary to reach the national optimum without tax competition. Competition reduces state taxes and the need for federal subsidies. Also, under competition, the firm locates efficiently. Therefore, tax competition does not always reduce national welfare.
Related Topics
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Economics and Econometrics
Authors
Ronald B. Davies,