CORPORATE TAX GAMES WITH CROSS‐BORDER EXTERNALITIES FROM PUBLIC INFRASTRUCTURE

Gerda Dewit, Kate Hynes and Dermot Leahy

Economic Inquiry, 2018, vol. 56, issue 2, 1047-1063

Abstract: We construct a model of corporate tax competition in which governments also use public infrastructure investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for cross‐border infrastructural externalities. Depending on the externality, governments are shown to strategically over‐ or underinvest in infrastructure. We also examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is the case when infrastructure is very effective in raising the tax base and generates a large negative cross‐border externality. (JEL F23, H40)

Date: 2018
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