The Role of Mobility in Tax and Subsidy Competition

33 Pages Posted: 24 Feb 2009

See all articles by Alexander Haupt

Alexander Haupt

University of Plymouth - Plymouth Business School; CESifo (Center for Economic Studies and Ifo Institute)

Tim Krieger

University of Freiburg - Department of Economics

Date Written: February 2009

Abstract

In this paper, we analyse the role of mobility in tax and subsidy competition. Our primary result is that increasing 'relocation' mobility of firms leads to increasing 'net' tax revenues under fairly weak conditions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in the governments' subsidy payments over-compensates the decline in tax revenues, leading to a rise in net tax revenues. We derive this conclusion in a model in which two governments are first engaged in subsidy competition and thereafter in tax competition, and firms locate and potentially relocate in response to the two political choices.

Keywords: tax competition, subsidy competition, capital and firm mobility, foreign direct investment

JEL Classification: H71, H87, F21, H25

Suggested Citation

Haupt, Alexander and Krieger, Tim, The Role of Mobility in Tax and Subsidy Competition (February 2009). CESifo Working Paper Series No. 2555. Available at SSRN: https://ssrn.com/abstract=1347968

Alexander Haupt (Contact Author)

University of Plymouth - Plymouth Business School ( email )

Mast House
Plymouth, Devon PL4 8AA
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Tim Krieger

University of Freiburg - Department of Economics ( email )

University of Freiburg
Wilhelmstr. 1b
Freiburg, D-79085
Germany

HOME PAGE: http://www.wguth.uni-freiburg.de

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