The effects of regional tax and subsidy coordination on foreign direct investment |
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Authors: | Andreas Haufler Ian Wooton |
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Affiliation: | a Seminar for Economic Policy, Department of Economics, University of Munich, Akademiestr. 1/II, 80799 Munich, Germany b Department of Economics, University of Strathclyde, Sir William Duncan Building, 130 Rottenrow, Glasgow G4 0GE, UK c CEPR, London, UK |
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Abstract: | This paper analyses the effects of a regionally coordinated profit tax or location subsidy in a model with three active countries, one of which is not part of the union, and a globally mobile firm. We show that regional coordination can lead to two types of welfare gain. First, for investments that would take place in the union in the absence of coordination, a coordinated tax increase can transfer location rents from the firm to the union. Second, by internalising all of the union's benefits from foreign direct investment, a coordinated tax reduction can attract more welfare-enhancing investment than when member states act in isolation. Depending on which motive dominates, tax levels may thus rise or fall under regional coordination. |
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Keywords: | F15 F23 H73 H87 |
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