Coordination of tax policies toward inward foreign direct investment

Amy Glass () and Kamal Saggi ()

International Journal of Economic Theory, 2014, vol. 10, issue 1, 91-106

Abstract: type="main" xml:lang="en">

We study competition for foreign direct investment (FDI) between host countries and the implications of tax policy coordination between them. By reducing its tax on multinational production, a host country can attract additional FDI, some of which is diverted from other host countries. The shift in FDI causes host wages to rise while wages elsewhere fall. The host country with the lower natural attractiveness for FDI (absent intervention) adopts a smaller tax on multinational production. Coordination between hosts eliminates the FDI diversion effect and leads them to impose a harmonized FDI tax that is larger than their non-cooperative tax levels.

Date: 2014
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