Regional Tax Coordination and Foreign Direct Investment

Haufler, Andreas and Wooton, Ian (July 2003): Regional Tax Coordination and Foreign Direct Investment. Discussion Papers in Economics 2003-17

Abstract

This paper analyses the effects of a regionally coordinated corporate income tax 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 tax 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.

• Item Type: Paper (Discussion Paper)
• Published in: European Economic Review, Vol. 50, 2006: pp. 285-305.
• Keywords: tax competition, regional coordination, foreign direct investment
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Economic Policy; Economics > Discussion Papers in Economics > Public Finance
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: F15, H73, H87
• Language: English