Does tax competition make mobile firms more footloose?

Ben Ferrett, Andreas Hoefele, Ian Wooton

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We examine a two-period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez-faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez-faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump-sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.

Original languageEnglish
Pages (from-to)379-402
Number of pages24
JournalCanadian Journal of Economics
Volume52
Issue number1
Early online date12 Jan 2019
DOIs
Publication statusPublished - 11 Feb 2019

Keywords

  • FDI
  • efficiency
  • dynamic tax competition
  • geographical change

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