Is There a Tradeoff between Economic Development Incentives and Economic Freedom?
30 Pages Posted: 27 Apr 2018
Date Written: December 6, 2017
State and local governments have used targeted incentives to recruit businesses for decades. The relationship between incentives and business formation, employment, and economic growth has been studied in detail. This paper extends this literature by examining the relationship between development incentives and economic freedom. Optimal tax theory assumes an exogenous government revenue constraint, suggesting that not collecting taxes from some businesses results in higher taxes on others, which may negatively impact economic freedom. By contrast, tax breaks could diffuse across firms and, thus, positively affect economic freedom. The paper investigates this relationship with state-level panel data between 1994 and 2013. We find an economically and statistically significant negative relationship between incentives and freedom, which is robust to several specifications.
Keywords: economic development incentives, economic freedom, subsidies, tax incentives
JEL Classification: H11, H71, H81
Suggested Citation: Suggested Citation