The Costs and Benefits of Supporting Data Centers: A General Equilibrium Analysis

Abstract

Abstract : Large data centers enjoy government support in many countries. These centers are energy-intensive, thus tending to push up electricity prices and possibly crowding out labor-intensive firms. In addition, when owned by multinational companies, profits are difficult to tax in the country of residence. We look at the benefits and costs of supporting data centers in a general equilibrium setting. A tax reform designed as a reduction of the energy tax paid by centers provides a way of supporting such centers. We show that the net benefits of such a policy depends crucially, in general equilibrium, on the value of a tax elasticity. This result can be interpreted as a ‘sufficient statistic’ regarding the welfare impact of such a tax-reform (in the country where the tax exemption is made). We also show that the approach can provide useful information in the sense of ‘sufficient statistics’ literature even when the tax reform is non-marginal.

Keywords: Data center, program evaluation, tax reform, electricity tax, General Equilibrium, sufficient statistic